Jun 16

A Note on Student Loans

 A few weeks ago I had wrote a post on the current state of interest rates in the student loan market, and right now I wanted to do a follow-up post on that. We are quickly approaching the July 1 deadline for student loan rates (from the government) to all jump to 6.8% if Congress does not act by then.

There are several plans outlined, but I wanted to highlight Elizabeth Warren’s plan in this post. I recently came across a petition for supporting Elizabeth Warren’s plan started by her. At the time of writing this, the petition has over 450,000 (!) signatures on it. While I may not fully agree with her plan, I think her method of attacking it and bringing the issue out into the open is the important part here.

If we can show Congress how important this issue really is by getting as many signatures as possible on this petition, I think it could really spark a debate or at least get the news talking more about this. I know that sometimes online petitions have a bad rap, and many times they are ignored – but in this case Senator Warren plans to deliver the petition to Congress.

You can sign the petition right here:

Photo Credits for this post: Mother Jones

May 22

Student Loan Progress – May 2013

For some reason I was looking forward to making progress on my student loans this month, instead of just hiding from them. I couldn’t wait to throw a huge amount of money at it, and show you and myself that progress can be made and that progress can hopefully be made quickly too. Now don’t get me wrong though, I definitely was not looking forward to the parting with my money!

Let’s dive right into the numbers and see what I did this month. First I’ll start with what my loans looked like last month:

April 2013:

Loan  Loan Amount  Interest Rate
Private 1  $ 27,220.04 7.92%
Private 2  $ 20,097.38 7.92%
Private 3  $ 3,067.54 7.92%
Private 4  $ 3,588.77 7.35%
Gov 1  $ 22,041.66 5.22%
Gov 2  $ 7,704.42 6.80%
Total  $ 83,719.81

Here’s what they look like this month after my payments were made this month:

Loan  Loan Amount   Change  Interest Rate
Private 1  $ 27,131.22  $ (88.82) 7.92%
Private 2  $ 20,037.32  $ (60.06) 7.92%
Private 3  $     $ (3,067.54) 7.92%
Private 4  $ 3,561.09  $ (27.68) 7.35%
Gov 1  $ 22,118.82  $ 77.16 5.22%
Gov 2  $ 7,566.56  $ (137.86) 6.80%
Total  $ 80,415.01  $ (3,304.80)

I made a huge payment this month, taking some money out of my huge emergency fund and I plan to do that again next month. I’ll break down exactly how much I paid and how much I took out of my savings account when I fully complete my monthly spending and budget. I completely eliminated Private Loan #3 and it felt really good to see one of my loans change its status to “paid in full”. It was a good psychological motivator to pay it in full and it was also one of the highest interest rates, so it sticks with my avalanche payment plan.

I’m also a little a lot pissed off at the government loan minimum payment being set lower than what even covers the accrued interest. I’ve never made a minimum payment before, but with my new strategy of targeting the higher interest loans first I decided to do that and put all the extra money towards higher interest ones. I guess I will have to be more careful from now on, but I still took a loss of $77 on that which annoys me. Imagine someone that can only afford to make the minimum payments each month and they are making zero progress? At least there are income based repayment programs for government loans, though these can pretty much make the loan last forever.

The next step for me will be to completely pay off either Private Loan #1 or #2, though I’m not sure which one I’ll be targeting first. They both have the highest interest rates remaining so I want to get them out of the way as fast as possible. I think I might go for #1 first, so that when I do finally finish paying that one off the 2nd one wont really seem as big.

May 20

Recent Student Loan Developments in the News

Recently there have been some developments regarding student loans in the news dealing with both the current and future interest rates. The current rates for subsidized student loans are 3.4% and unsubsidized loans are locked in at 6.8%, with many private loans coming in at rates even higher than this. Right now the 3.4% interest rate loans are set to double as of July 1, though there are bills on the table to prevent this rise from occuring

Then there is other end of the spectrum – Senator Elizabeth Warren is actually campaigning to get the rates on student loans lowered.

As you can see from the above image, she wants students to be able to get loans for the “same rate as the banks”. I personally find this a bit ridiculous, as the 0.75% rate is the overnight lending rate to the banks. These loans are not being held for 4+ years and it would be impossible to even break even at these rates. Trust me, I am no fan of the banks but I just don’t see this strategy being feasible or sustainable. Whoever is loaning you money needs to either profit (private), or be able to break even (government or non-profit).
I’m not 100% sure about all these rate changes, because I’m not sure how much subsidized loans actually come back to the taxpayers but I do agree that student loans should be able to pay a competitive rate. You can get a mortgage around 3% in the current environment and car loans and other loans can also give much better rates when compared to the current student loan market, especially on the private side of things.
I know there is a lack of collateral behind student loans when comparing it to mortgage or a car loan, but there is also the fact that student loans are very rarely discharged in bankruptcy – they are with you for life! A better campaign would be to try and keep the subsidized loans at a rate of 3.4% in the current environment, and focus on getting the rest of the student loan rates below 5%. I think this would be a fairly reasonable solution and would help out a lot of students. Of course, we all know what happens when reasonable and Congress are brought up in the same sentence. We end up with two extreme stances and have to hope they somehow to end up on that reasonable solution.

I still personally believe the biggest thing that needs to be done about student loans is education as I had said in a previous post. General education on personal finance, taxes, and credit in general would be great too! This topic in general is of great interest to me, because the interest rate on my student loans is what really makes me want to get rid of them. The fact that I’m losing so much extra money each month on top of the money I borrowed is what really is driving me to pay them off as soon as possible.

What is your opinion on the current state of the student loan interest rates? Do you think lowering them is the correct solution? 

Further reading on this topic: 
LA Times – Elizabeth Warren Proposal
NY Times – Preventing Student Loan Rate Increase

May 11

Student Loan Education

I personally believe the biggest thing that needs to be done about student loans is education about what exact these student loans mean for your life after college. I personally had no idea the extent the amount of debt I was piling up while at school or how exactly it would affect me after graduation. I definitely didn’t have much knowledge on personal finance, investing, or anything of the sort – and I’m still a novice at this.

My parents did teach me the importance of saving money, not wasting money, looking for deals, and never abusing credit. For this I thank them; I have never built up a credit card debt and always pay the full amount each month.

But when it came to student loans, this was brand new to all of us. My parents had never went to college, and my high school guidance counselor never even hinted there was another option. I had great grades and student loans were just part of the process of going to college in my mind.

Most 17-18 year old seniors in high school have no idea the concept of a huge sum of money. The extent of their personal finance probably comes from car payments, car insurance, gas money, and money to hang out with friends. They most likely do not have a mortgage and hopefully don’t have a huge credit card debt to their name. The concept and size of $25,000+ student loan debt is foreign to them.

A few things that I think can prevent situations like my own, or even worse case scenarios is full education on student loans:

  •  Guidance Counselors in High School and parents should be able to tell students that college isn’t the end all solution. It IS possible to learn a trade, get job experience, and still be just as successful within certain professions.
  • Community college is a great option, especially if you are unsure of what you want to do. A majority of people switch majors, so you can save here by making the change at a lower cost.
  • Many state schools have great reputations and can be a lot cheaper per year compared to private schools
  • Before accepting any loan students should be given a screen showing how much they are taking out for that year and then the following calculations would also be mandatory for the lender to show before the borrower accepts: 

      1. We’ll go with an example of $5,000 a year. First of all, the student should be shown how much this $5,000 debt will actually be if it is unsubsidized loan. If that loan is taken out freshman year, it will be closer to $6,500-$7,500 by the time the student graduates. The borrower should be made aware of this amount!
      2. The borrower should be given an estimation of their 4 year cost of going to school based on this first loan. So if they are taking out $5,000 for the first year, it should show them that they will most likely end up with $25,000-$30,000 total in debt after graduation. I believe that seeing the total amount gives a much better perspective than the individual amounts being taken out each year
      3. The borrower should then be given an estimation of how much their minimum monthly payments would be based on that calculated total debt. I think it should also show them an estimate of how much is going to principal each payment, and how much would be going to interest.
      4. The last thing would be that they are able to select various degrees and the area of the country they are in and be given salary estimates. Based on these salary estimates, the net income for each month should be shown and then the student loan payments should be subtracted from that total. The borrower would then be able to see how much money they would have leftover each month after those minimum payments. 

          I believe that if this transparency was shown before every student took out a loan, you would see a lot of people rethinking their choices. That $50,000 graduating salary doesn’t look as good when you have to give half your take home pay to paying that loan off! Just being able to see the huge amount and the effect it will have on you in front of your face would be a huge deal.

          Do you think that education and transparency about student loans would help reduce the amount of debt that students are graduating with?

            Photo Credits for this post: Pixabay