Raysa Leer's Blog

Student Loans: Millennials, We’re All in it Together

At last! The nation is talking about student loans issues!

Student loans have been coming up in national news, in financial magazines (Kiplinger’s – see below), in online petitions…everywhere!

This is great news because student loans have been a looming problem for quite some time. The cost of education in this country has risen dramatically in the last few decades. I’m sure many of you have heard your parents talk about how they went to college and worked at the same time to pay their way. Haha! If only! Those days are long past, and now young people struggle with the cost of higher education. Some are just beginning to think about it (oh, you recent college grads…if I had known what I know now when I was your age!), others of us are working out the best way to pay down our debts.

Student Loans in the News

You may have heard that Congress is taking up the subject of keeping interest rates on some student loans from increasing. Subsidized federal Stafford student loans currently have an interest rate of 3.4%. However, that rate could double to 6.8% if no legislative action is taken to maintain the status quo. Subsidized federal student loans (given out based on demonstrated financial need) are only one type of loan students may take while in college, but they’re receiving the bulk of the attention right now. “Unsubsidized loans, which are available to students regardless of financial need, already have an interest rate of 6.8 percent,” states Inside Higher Ed, “and the interest accumulates while borrowers are still attending college.” Many students have unsubsidized loans, yours truly included, so its important to know where you stand and how the news on student loans relates to you.

Student Loans in Various Media Forms

So how excited was I to arrive home today and find my June 2012 issue of Kiplinger’s Personal Finance in my mailbox? I enjoy this personal finance magazine more than I can say, and I would (and have) highly recommend it to individuals interested in learning more about the world of finance. (Also, follow them on Twitter: @Kiplinger). As I sit back to flip through the content, I find myself reading the “From the Editor” page. I like to start here because Janet Bodnar always takes some time out to talk about current events and how they shaped content of the issue. As I’m reading along, I find she’s giving a shout out to Gen Y (millennials) [she even uses the term!]. And she’s addressing all the major issues: a poor labor market for recent grads, large student loans, a bear market, and moving back home!

Millennials, which of us have not faced at least one of these challenges since 2008?

It isn’t just the news media or personal finance magazines picking up this discussion. #studentloans is a prominent hashtag on Twitter. This blog is one of many sounding off on the subject. Lots articles I see my friends sharing on Facebook relate to the latest issues surrounding student loans. I even received an email from a friend, who was only half-kidding when they said that they couldn’t buy a <$15 LivingSocial deal with a group of us because they had to pay their loans starting this month. Shoot, when you’re coming out of your master’s with student loan debt, every penny counts!

My Story

I happen to be one of the lucky ones. I came out of my undergraduate years with around the average level of student loan debt that most Bachelor degree holder’s find themselves managing. My loans were a mixture of federal and private, the bulk of them being federal. The private loans were the result of the FAFSA doing me absolutely no good – I have a lot of issues with that application that I won’t go into here and now – and going abroad for a month right when financial aid information was due for the next academic year. I had thought all documentation had been submitted, but apparently ONE form had failed to submit properly… and by the time I realized the issue, all that was left in the world of student aid was loans. Looking back, I could have worked with our Financial Aid office to a greater extent but I was, for all intents and purposes, a first-generation college-goer and didn’t know enough to camp out in their office. Again, to know what I know now then.

I was very conscious that my grace period was not a lengthy one. I had also established that rather than jumping right into a master’s degree, which would have allowed me to defer my loans a bit longer, I wanted to join the working world. It was time to gain some skills. I also wasn’t entirely sure what I wanted to get my master’s in, and spending  thousands of dollars (and probably adding to my loan debt) without being certain didn’t make sense to me.

In the end, I was lucky. And blessed. I worked three part-time jobs after graduation and had a very generous living situation (thank goodness for friends!) that allowed me to save my money. My home state did not have much to offer in the way of job opportunities, and that was right at the start of the Recession. I knew I had to move to where the jobs were – read: the East Coast. Particularly the nation’s capital, where it was clear entry-level jobs still existed at the time. My grace period ended two months before I made my move, but I was able to cover those costs and still save enough to relocate.

I was again lucky and blessed to find a job VERY quickly after arriving in town, and this allowed me to continue paying the bills and to begin saving. The big questions: save, invest, pay the loans off faster?

The Friends’ Stories

Many of my friends had different stories. A wonderful few had no undergraduate debt. Their parents had been able to help them pay for those four years of postsecondary education. However, many went on to get their master’s degrees and accumulated debt that way. Most graduated to find jobs and have settled or are settling into making their monthly payments.

Some friends have put off starting their master’s because they’re hoping to find an employer that will pay their bill for them. Again, I happen to have that benefit. Another friend of mine does as well, and we’re taking full advantage. For my friends who are still looking to start their master’s and whose employers don’t offer that perk, the question of where to get their degree has been dominated by the price of the various institutions they’re researching.

What to Know About Loans

For those not yet out of college, there is a lot to know. For those out of college, there is a lot to consider and keep in mind.

1) Learn about financial aid. 

• For those who are new to college, I can’t stress enough the importance of educating yourself about your financial aid options. This is something I should have done a better job of in undergrad. More schools now, too, are taking the time to make things easier for students and their families; providing clearer explanations of financial aid packages, information on loans, and lists of things to consider before signing on the dotted line.
• For those who are already past the college years, don’t forget your experiences and help those coming behind you. Share what you learned. Consider volunteering at financial aid workshops in local high schools or being a mentor to soon-to-be high school grads. Giving young students an edge before they walk into the complicated world of college is a great service.

2) Know what kind of loans you are going to get/have. It won’t do you any good to try to plan your finance life without having a clear picture of where you will be/are.

• If you’re in college or about to start out, learn the difference between the loans you’re being offered. They may not all be right for you. Also, if you have questions, ASK. Talk to your financial aid counselors and make sure you have a very clear picture of how your education is being paid for. Even if your parents like to get involved, don’t sit on the sidelines. It’s your life and your future, so you should be right in the middle of the conversations.
• For those who have graduated, make sure you know your loans. You should know your lenders, how much you owe each one, and your repayment status. If you have a grace period, know when it ends and plan ahead! Don’t let your first payment catch you by surprise.
• If you’ve been out of college for some time, make sure you take time to periodically check your loans. Things may change. It’s especially important to keep track of things when you’re jumping in and out of deferments (if you go back to school) or forbearances (you might get a forbearance for a number of reasons – see here).

3) Know Your Repayment Options

• For those who have graduated, make sure you know what your repayment options are. With federal loans, you are typically placed on a standard 10-year repayment plan.
• If the standard repayment plan’s monthly payments seem to high, you may have the option of a graduated payment plan. This plan starts off with lower monthly payments which slowly increase over the years of your repayment plan. It’s important to note that a graduated payment plan will cost you more in interest payments in the long run.
• Another option is the Income-Based Repayment (IBR) option. Your payments are based on and capped by your income. For more information about the IBR options, see here.

4) Keep track of your interest rates. Pay the loans with the highest interest rates off first if you can.

When it comes time to repay loans, you may look at your total debt and say, “Wow, I will never pay this off!” For many, it will take time…years. A lot of people want to know how they can speed up the process. If you have multiple loans with multiple interest rates, one important question to consider is which loan to pay extra on first.

• Start by paying off the loans with the highest interest rates. If you have a mix of federal and private loans, these are almost always your private loans.
• Make sure that if you pay extra on your monthly payment that you make it clear, either in writing with your check or via their online payment system, that you want any extra money you’re paying beyond your monthly minimum to be applied to your principal (the total amount your borrowed). If you don’t tell them in writing or make it clear by choosing the right option in the online payment system, they will apply extra money to your future payments.

5) Know about loan consolidation (and decide if it’s right for you)

Loan consolidation isn’t for everyone, but it may benefit you under the right circumstances. There’s a wealth of information on loan consolidation online, but a place to start to learn more about the pros and cons can be found here.

Clearly, there’s a lot to know about student loans. Just remember that you’re not alone and help is available!

• Search for answers online. Any question you have about your student loans someone has probably had, and asked, online already.
• Ask around. Family and friends can be great resources. With your peers, don’t share private information but do feel free to ask about their experiences. It’s a great way to get tips and learn from other people’s’ mistakes.
• Keep up to date with the latest news. It could directly affect you, so better to be in the know! If you don’t watch/read the news, take two seconds to search the topic on Twitter to see what people are saying.
• Don’t freak out!
• Don’t ignore the issue. Sticking your head in the sand doesn’t make student loans go away. Confront the issues, arm yourself with knowledge and make the best informed choices you can.

A final thought on paying back your loans early. There’s a lot of information out there on this, so research this question carefully. But here are a couple of things you may want to consider if you find extra cash burning a hole in your pocket and you’re wondering how to use it:

• Have you paid off your credit card debt? If you don’t have any, congratulations! Gold star for you! If you do, make sure this is the first thing you take care of with any extra cash floating around. Credit card debt is not “good debt” like your student loans – and your student loans being “good debt” is coming into question these days. Too much of credit card debt can put you in a really bad position. Handle your business, pay off your card(s), don’t run them up again and then start looking at the other points below.
• Have you started an emergency fund? Paying back your loans early is great but those payments that could have stocked your rainy-day fund won’t help you if you have a medical emergency or your car gets totaled. Having an emergency fund is something I’m sure I’ll talk about again in this blog, but I cannot stress its importance enough. Make sure you consider creating such a fund right away if you don’t have one.
• Have you started contributing to your retirement fund? Yes, I know. You’re young. Retirement is a long way off. But saving young has been advocated by financial experts over and over (and I read yet another article on it just today – that I can no longer put my finger on!). For those looking to be millionaires by the time they retire, starting to save young is key! Also, do you want to be 65 (or 70-something, the more likely age-range for when millennials will be allowed to retire) and realize you have no money to live on? No cushion whatsoever? Start now. We’ll talk more on this, but again…start now.
• Have you saved up for any major expenses you know are looming? Ok, you have cash today. But didn’t you just say you needed to buy a car in the next 3 months? Weren’t you planning on moving into the city center where rent is a few hundred more every month (but it’s the right choice because it’s nearer to your job and cuts your commuting costs in the long run)? If you know you have expenses on the way and that you might need the cash, put it away somewhere safe (short-term savings) so that it’s ready when you need it. (This category is for needs, by the way, not wants. If the choice is between buying a flashy new toy or paying off money you already owe, pay where you owe.)

So I hope some of this was helpful and gave you food for thought. Tell me -

Do you feel you have a good handle on your student loan situation?

Do you feel you know where to get more information regarding your questions?

What other advice would you offer millennials about student loans?

Any other words of solidarity you care to share! After all, we’re all in this together!

Image credit: Occupy* Posters, Flickr