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:
- 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!
- 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
- 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.
- 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