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College Affordability and Preparedness

A Bank Executive Shares 6 Make-or-Break Student Loan Tips

Photo: Courtesy of Michael Pechardo

“The student loan debt in this country has skyrocketed in the last decade,” says Thomas, EVP of SouthEast Bank and former lead development/execution advisor for the U.S. Department of Education’s $40 billion Straight-A Funding Conduit Program. She explains that student debt in this country has risen from approximately $730 billion in 2008 to around $1.4 trillion today. 

Part of the problem, Thomas argues, is that more and more borrowers don’t understand how the repayment of student loans works. Understanding how repayment options like deferment, forbearance and income-based repayment are essential to keep total loan costs from ballooning. Deferment refers to temporarily putting off student loan debt repayment due to qualifying conditions such as waiting until after a borrower finishes or discontinues school. Forbearance is the act of gaining approval for suspended payments due to a number of situations, such as financial hardships. As a borrower, this may negatively affect your credit. Students also have the option of applying for income-based plans through which their monthly payments can be lowered. 

These choices may seem convenient, but what many borrowers don’t realize is that the interest on the loan continues to accrue. The interest that is collected in this period is then capitalized and applied to the principal of the loan. This can then extend the full amount of the loan and drastically increase the total balance due. A federal loan that started at $10,000 could double or even triple during these time periods.

“The federal government is actually promoting these alternative repayment plans and the borrowers are not fully understanding the negative impact of delaying paying back their student loans, in my opinion,” states Thomas. This is because federal student loan programs enable student loan balances to rise by encouraging deferment, forbearance and income-based repayment plans. A recent New York Times article even cited a two-year study that exposed college consultants offering student incentives for putting loans into forbearance. This allowed schools to keep default numbers low but severely hurt borrowers who saw ballooning debt amounts. Thomas concludes, “we may teach college kids to make better repayment decisions, but this crisis will not subside until federal programs change.” 

So what, now, can degree-hopefuls do to avoid amassing inflated amounts of student debt? Barbara offers a few simple tips that even a novice borrower can follow:

1. Don’t max out

Only borrow what you absolutely need for school. Never take out the maximum allowable amount unless truly necessary. 

2. Pay today

Begin making your monthly payments immediately after receiving your loan (unless of course your interest payments are subsidized and paid for by the federal government while you are in school). Even while still enrolled in school, making payments builds credit and strengthens your foundation for financial success.

3. Live within your means

Save money for your monthly payments by being more frugal. This may include making your own coffee, cooking at home and choosing cheaper public transportation.

4. Hustle for that diploma

Graduate on time. Don’t add extra expenses by having to spend an additional year or two in school.  

5. Reevaluate at graduation

Once you graduate, look at the loan types you have. Do you have both federal and private loans? Know the interest rates of your loans and then compare refinance rates and options.

6. Continue your education

As a recent college graduate, don’t fall into a false sense of security. Graduates should work towards gaining more knowledge about the repayment process and being financially responsible. Understand all repayment options and be aware of how these options will affect the total balance of your debt.

Sheena Ingle, [email protected]

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