I think one of the most frustrating realities of personal finance is that it is totally possible to make mistakes when you are young that have a huge impact on your life and finances for many years to come. Take student loans, for example. They don’t sound particularly scary. When you are in school you know many people who have them (in fact, odds are good that you knew more people who had student loans than didn’t). It seems like taking out student loans is “what everyone does.” So what could be scary about that? Plenty!!
6 Things I Wish I’d Known Before Getting Student Loans
1) They will need to be paid off. It sounds stupid, but I think sometimes when you are dealing with large amounts of money for student loans it can feel a little like Monopoly money. For some reason when we are taking out student loans we may not stop to consider the fact that we are dealing with amount larger than we’ve ever made before (at least that was the case for me!)
2) That you are going to have to pay interest. And in many cases if you ever defer the loan payments for any reason, the interest is going to continue to accumulate! Deferment is not a nice vacation from loan payments- the loan company is making money off you in the form of interest while you are in deferment (except in certain cases such as subsidized loans).
3) That you are going to be paying them off for a long time. You will usually be paying off your loans for a much longer period of time than you actually went to school for. I think if I had stopped to consider this fact while in school, it would have inspired me to live much more cheaply while in school (instead of living too high on student loans as I did). My loans are currently scheduled for a 25 year payment plan- that’s a quarter of a century, people! I certainly wish that my 22 year-old self had stopped to consider that.
4) That it is nearly impossible to get out of paying off your student loans. Pretty much the only way to get out of paying off your student loans is to die. In most cases they cannot be discharged in bankruptcy. Yes, you heard correctly: you have to pay them off or die. That to me is the sign that student loans are a very dangerous form of debt.
5) That large debt like student loans can put a damper on many other things in later life. Money that could be used to save for a down payment on a house or an increase in your retirement savings instead is flying out the window every month to pay back your student loans.
6) That the student loan company is going to get theirs first. Meaning that when you first start paying off your student loans if you only make the minimum payment you are essentially making pitiful progress on getting the principal paid down. Why? Because the student loan company is getting theirs first, of course! At the beginning of your repayment period the bulk of your payment will likely be going toward interest. What, did you think that somehow these things were going to be stacked in your favor?
My hubby and I actually graduated at a really great time, in 2006. In the mid 2000s in the US, student loan interest rates were at record lows. We managed to consolidate and refinance our loans then and we got great interest rates of 2.5% and 3.5%- the repayment period also got extended to 25 years when we did that. Fast forward seven and a half years later and guess what? We have made very little progress in getting the loans paid down because of #6. Even though we have great interest rates, we are really sick of making payments on these loans at this point and having a large amount of debt is starting to impact our financial decisions for the future. So we’ve recently changed our attitude on debt and have decided to make some financial changes to turbo-charge our debt payoff and just get it gone.
Luckily we are able to live in a low-cost area and have worked hard to keep our cost of living well below our means, so we are able to do that. However, there are most definitely people graduating today or who have graduated in recent years that may not have the option to do this. Either they have to live in a high-cost area because that’s where the jobs are, or even worse: Despite the fact that they may have a good job they may not be making enough to cover their student loan payments along with the rest of their expenses.
The moral of the story: if you know someone who is considering taking out student loans, educate them! Help them become more aware about student loans. Show them this article. Tell them to check out Scholarship Owl to see if they can get any scholarships before they go the student loan route. Or direct them to these websites that offer a wealth of information on student loans.
Can you think of anything else that you wish you had known before taking out student loans?
Update: Ever since we decided to screw the math and get out of debt, we have now shaved over 12 years off our estimated repayment time. At this rate we fully expect to be completely out of student loan debt within the next year!!