Never Ending Student Debt

Holy cow. That’s a lot of money. Thank goodness you don’t have to pay that back! Oh wait, you’re probably a student that has to pay back a portion of that. Sorry. Student loans are going to be a massive part of our lives moving forward. There is more student debt out there than credit card debt! To give a little context, here’s a chart for comparison.

Total Debt Owed to Customers

This doesn’t take mortgages into account, which is twice as great as all of the above total debts combined.

One more chilling thing about this? More than 65% of high-debt student loans borrowers reported that they did not understand the terms of their loans.

Whether it was up to the students to understand them or if these students are victims of a predatory lending system are up for debate,  either way this could quickly turn into a massive problem.

Students preparing to go to college are often not prepared to make this financial decision, and if parents are sending their first kid off to college and have not attended college themselves, it’s tough to expect them to fully understand the process. We’re going to talk about some of the facts surrounding student loan debt.

There are six basic types of student loans and I’m not going to go into the specifics of how each of them works, but if these general descriptions sound like the type of loan that you may qualify for, you should do more in-depth research.

Loan TypesPrivate Loans

Private loans are especially important to understand out of this list because special rules apply for these that debt carriers are not always aware of. These loans often require a cosigner for the loan, usually a family member. These are offered by banks and credit unions, so they may have a higher interest rate than federal loans. On the whole, only about 15% of student loans are held privately. Since these loans usually require a cosigner, that means that these loans can usually be passed on to family members.

Student Point of View

So how do you go about applying for student loans? Well the government has that covered for you (seems like they’ve thought of everything). You must fill out the FAFSA. Almost everyone in college knows what this is because they are required to fill one out. FAFSA stands for Free Application for Student Aid and this application is sent off the U.S. Department of Education to be analyzed. A few days after sending it in, the DoE will send back an SAR which stands for Student Aid Report. This will tell you how much money is awarded. It’s important to note that under no circumstance do you treat that award as income for taxable reasons.

The Beauty of the Subsidized Student Loan

Typically, when a student loan is taken out, students don’t pay interest on that loan (because they’re in college and can’t afford to). This means that while you are in college, you are accruing interest on the loan. Now, typically that interest is absorbed as the principal on the loan and you end up paying interest on your interest. This is really bad, unless you have a subsidized student loan. The government will actually pay the interest on your loan so you don’t have to. The government gives you a grace period to start paying back your loan. You are able to make payments on this loan before the grace period is over though, which allows you to get a jump start on that pesky principal.

Payment Plans & Deductions

Once you’re out of school and making some money (fingers crossed you have a job after school), you should start paying back those loans. Federal loans have a standard payment plan of 10 years. The goal is to pay off your loans before this though. The more money you throw at them the quicker you will pay them off and the less interest you will have to pay. There are such things as income driven plans, which allow the debt holder to pay what they are able to, lower their monthly payments, and stretch out the length of the loan. This means that you will pay more in interest though, so try to avoid that.

Deductions for student loans are important too. For unmarried filers, you can deduct up to $2,500 of interest paid on federal loans each year. This rule usually applies to private loans as well, but not always, so make sure to read up on the tax implications with an expert. You can also pause your payments after you graduate if you’re really having trouble making those monthly payments. While the payments are paused, you will accrue interest on that loan which will only hurt you in the long run.

Impact on the Economy

This all sounds pretty gruesome, especially considering that 27% of students move back in with their parents after graduation since they do not have a job. After that grace period is up, the U.S. government is able to start garnishing wages to help pay back that student loan. Here’s another interesting thing to consider:

Amount of Debt Each Household that Holds Each Type of Debt Holds

Of the people that carry the above types of debt, this is how much they owe on average. This is really hurting the housing market because millennials are less likely to go out and purchase houses after they have graduated college. This is boosting the renter economy, but acting as a headwind to new home starts. And all of this as total student loan debt grows at over $3,500 a second? We’re in for a rough road ahead.


Sources

Admin. (2014, October 23). How Do Student Loans Work. Retrieved from Millennial Personal Finance: http://www.millennialpersonalfinance.com/how-do-student-loans-work/

Millennial Money Man. (2016, January 8). 27 Heartbreaking Facts About the Student Loan Crisis. Retrieved from Millennial Money Man: http://millennialmoneyman.com/27-heartbreaking-facts-about-the-student-loan-crisis/

Shin, H. S. (2013, October 14). How will the government shutdown affect you as a college student? . Retrieved from The Daily Californian : http://www.dailycal.org/2013/10/14/will-government-shutdown-affect-college-student/

Simonds, M. (2016, August 16). How Do Student Loans Really Work? Retrieved from StudentLoanHero.com: https://studentloanhero.com/featured/how-do-student-loans-work/

TurboTax. (2016). How to Report FAFSA College Money on a Federal Tax Return. Retrieved from TurboTax: https://turbotax.intuit.com/tax-tools/tax-tips/College/How-to-Report-FAFSA-College-Money-on-a-Federal-Tax-Return/INF15115.html

 

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