Paying for Life Article
“Paying for Life” Understanding Student Loans What academic vocabulary do I need to know?
“In the charts below, the top section represents interest and the bottom represents principal.”
• Loan: A loan is money you borrow that must be paid back with interest. • Principal: The amount of a loan; how much you borrow is the principal. • Interest: Interest is the price paid for borrowing money; interest is what
you pay in exchange for being loaned the principal. • Bankruptcy: A person or business declares themselves unable to repay their debts during a legal preceding known as a bankruptcy. • Garnish: To garnish means to withhold funds by legal decree for repayment to another party. Why might I need student loans? Most students need to borrow money to pay for their college tuition and related expenses. In fact, 2/3 of today's 4-year college graduates have some debt: in 2011, the average undergraduate financed roughly $24,000 (“24K”) of their degree. What kind of student loans can I receive? In the United States, there are two types of student loans: federal loans sponsored by the U.S. government ("public loans") and private loans— those issued by private banks. Most college students in the United States qualify for federal student loans. How much interest will I have to pay? Interest rates on federal student loans are set by Congress; recent graduates are paying between 3.4% and 6.8% interest on their "public loans." Interest rates on public loans are fixed, i.e., the interest rate on a loan with a fixed rate will not change. In contrast, interest rates on private loans are often higher—in many cases, exceeding 11%— and may be either fixed or variable. Borrowers must always be cautious of variable rate financing; the interest rate on a variable loan may rise in the future, potentially increasing its total cost dramatically. How do I pay my loans back? When and how quickly you have to repay your student loans depends on the kind of loans you receive. In the case of public loans, you normally are required to pay back what you owe over 10 years. However, alternative payment plans may allow you to extend the amount of time you have to pay back your loans, up to 25 years. Some federal loan repayment plans are "income-based," which means that your monthly payments are determined by how much money you make: the more you make, the more you are required to pay back each month.
What happens if I don't pay back my student loans? There is no way to escape student loan debt, not even through bankruptcy. If you do not make payments on your federal student loans, your loans are considered to be “in default.” As of 2011, 8.8% of students in the U.S. defaulted on their loans, i.e., they failed to make their payments. If you default on your student loan, the following consequences may result: • • •
Your wages may be garnished Your professional licenses may be revoked You may be charged a penalty, up to 25%
Who benefits from student loans? • •
•
•
•
Students pursuing their college dreams—especially those from lower socio-economic backgrounds. Colleges, unfortunately, take advantage of the fact that students receive financial aid by consistently raising tuition without much regard for students' ability to repay their loans. Banks are like any other business except that their product just happens to be money. Banks make a profit on student loans because of the high interest rates and fees they charge. The U.S. government generates billions of dollars in profit from its student lending program each year, because the interest payments—made by students on their loans—exceed the government's own borrowing costs. Our society, and the high-skilled economy of the future, needs an educated workforce— colleges are responsible for training tomorrow's workers. Investments in higher education generate social and economic returns that strengthen our country.
Put simply, colleges, the U.S. government, and private lenders all profit by loaning money to students. In other words, granting loans to students is not charity: it's big business. What do experts say about student loans? When it comes to paying for college, most experts agree that students should complete the Free Application for Federal Student Aid (FAFSA) so that their eligibility for various forms of financial aid may be evaluated. They believe that students should exhaust grant, scholarship, and federal loan eligibility before considering private student loans. Many experts also agree that student loan debt—now totaling over one trillion dollars—is one of the biggest problems facing our country. It used to be a no-brainer to pursue higher education; however, since the recent financial downturn began in 2008, 85% of college graduates have moved back in with their parents after receiving their degrees. Even worse, 45% of students do not even graduate from college but nevertheless must repay their loans.
“In the charts below, the top section represents interest and the bottom represents principal.”
• Loan: A loan is money you borrow that must be paid back with interest. • Principal: The amount of a loan; how much you borrow is the principal. • Interest: Interest is the price paid for borrowing money; interest is what
you pay in exchange for being loaned the principal. • Bankruptcy: A person or business declares themselves unable to repay their debts during a legal preceding known as a bankruptcy. • Garnish: To garnish means to withhold funds by legal decree for repayment to another party. Why might I need student loans? Most students need to borrow money to pay for their college tuition and related expenses. In fact, 2/3 of today's 4-year college graduates have some debt: in 2011, the average undergraduate financed roughly $24,000 (“24K”) of their degree. What kind of student loans can I receive? In the United States, there are two types of student loans: federal loans sponsored by the U.S. government ("public loans") and private loans— those issued by private banks. Most college students in the United States qualify for federal student loans. How much interest will I have to pay? Interest rates on federal student loans are set by Congress; recent graduates are paying between 3.4% and 6.8% interest on their "public loans." Interest rates on public loans are fixed, i.e., the interest rate on a loan with a fixed rate will not change. In contrast, interest rates on private loans are often higher—in many cases, exceeding 11%— and may be either fixed or variable. Borrowers must always be cautious of variable rate financing; the interest rate on a variable loan may rise in the future, potentially increasing its total cost dramatically. How do I pay my loans back? When and how quickly you have to repay your student loans depends on the kind of loans you receive. In the case of public loans, you normally are required to pay back what you owe over 10 years. However, alternative payment plans may allow you to extend the amount of time you have to pay back your loans, up to 25 years. Some federal loan repayment plans are "income-based," which means that your monthly payments are determined by how much money you make: the more you make, the more you are required to pay back each month.
What happens if I don't pay back my student loans? There is no way to escape student loan debt, not even through bankruptcy. If you do not make payments on your federal student loans, your loans are considered to be “in default.” As of 2011, 8.8% of students in the U.S. defaulted on their loans, i.e., they failed to make their payments. If you default on your student loan, the following consequences may result: • • •
Your wages may be garnished Your professional licenses may be revoked You may be charged a penalty, up to 25%
Who benefits from student loans? • •
•
•
•
Students pursuing their college dreams—especially those from lower socio-economic backgrounds. Colleges, unfortunately, take advantage of the fact that students receive financial aid by consistently raising tuition without much regard for students' ability to repay their loans. Banks are like any other business except that their product just happens to be money. Banks make a profit on student loans because of the high interest rates and fees they charge. The U.S. government generates billions of dollars in profit from its student lending program each year, because the interest payments—made by students on their loans—exceed the government's own borrowing costs. Our society, and the high-skilled economy of the future, needs an educated workforce— colleges are responsible for training tomorrow's workers. Investments in higher education generate social and economic returns that strengthen our country.
Put simply, colleges, the U.S. government, and private lenders all profit by loaning money to students. In other words, granting loans to students is not charity: it's big business. What do experts say about student loans? When it comes to paying for college, most experts agree that students should complete the Free Application for Federal Student Aid (FAFSA) so that their eligibility for various forms of financial aid may be evaluated. They believe that students should exhaust grant, scholarship, and federal loan eligibility before considering private student loans. Many experts also agree that student loan debt—now totaling over one trillion dollars—is one of the biggest problems facing our country. It used to be a no-brainer to pursue higher education; however, since the recent financial downturn began in 2008, 85% of college graduates have moved back in with their parents after receiving their degrees. Even worse, 45% of students do not even graduate from college but nevertheless must repay their loans.
