Funding college comes with financial understanding to pay back student loan debt after graduation. This guide will help prepare you.
According to the Federal Reserve, 44.5 million students in America alone owe a collective $1.5 trillion as of March 2018. The record amount of student loan debt is testing the economy and greatly affecting the pockets of those in debt.
There’s no doubt that the traditional methods of earning one’s education, as in attending an on-campus university, is costly. For this reason, 45% of recent graduates earn their degree with accumulated debt.
Finances should be of concern when earning your education, but it should neither stop you nor be made to feel impossible to manage when your degree is your priority. You can prepare yourself to not fall into the debt trap of education.
Here’s a look at how:
What is Student Debt (Around the World)?
America doesn’t stand alone in its student debt crisis, although its debt amount is at the top of the rankings.
For the 2016-2017 school year, student loan debt stood at $54 billion. However, Australia grants an interest-free loan repayment program and the debt is considered to be an asset on the government’s balance sheet.
Canadians owe $28 billion to the government in student debt. Although Canada has the second most graduates with a bachelor’s degree (after Korea), they are not suffering as much from student loan debt. That’s because Canada has a program called “interest relief” in which the government pays the interest on loans for the first 6 months after a student graduates and will extend that for up to 30 months so the loans are in effect interest-free during that time period.
As of March 2018, more than 105 billion pounds is owed to the English government. In England each year, about 16 million pounds is loaned to roughly one million students.
In a country where tuition is free, debt costs are still rising as students borrow for living costs and fees. Swedish graduates have the highest debt-to-income ratio, but that’s because the cost of living is so high. The government helps to subsidize living expenses while students study.
How Debt Happens
Debt occurs the moment money is borrowed. It means that you owe something back. However, because so many students have to take out loans to pay for school, the debt amount continues to grow.
The bigger issue is when the debt cannot be repaid. Once a payment is late or missed, it can be considered delinquent. If the amount remains unpaid for 270 consecutive days, it then goes into default. For private loans, they can go into default any time after a missed payment.
Here are a few common reasons why loans go into default. Knowing the signs can help you prepare in advance to avoid them.
If interest rates increase, then the payment plan is altered which affects one’s budgeting and payback plans.
Paying back a loan becomes part of your monthly budget. If the budget is already tight, any variation can affect the ability to pay back the loan amount. That’s why it’s important to consider loan paybacks as you’re allocating money for food, transportation, rent and all other necessary goods.
Finding employment is a key factor in being able to pay back a loan because it’s where you earn your money. Therefore, remaining employed is equally important.
Missing one payment can trap you into a cycle where the payback amount continues to rise and you fall behind more quickly.
If a co-signer or someone helping you pay back your loan suddenly passes away or can no longer assist, you need to find a way to make the money to cover the amount.
How To Avoid Student Loan Debt
1. Consider Tuition-Free Education
While tuition-free education will not always make the necessity of loans disappear, it can help alleviate the burden. For example, University of the People offers tuition-free, US accredited, online degrees that cost a fraction of what traditional higher education institutions cost. While there are relatively small fees associated with the application and course assessments, a student is able to earn degrees like an MBA for an estimated $2,500. Some of the most expensive programs in America can cost $144,000, like Harvard’s, which is why earning your degree at a school like UoPeople can avoid putting you in debt since the initial costs are so much lower, and therefore, more likely to be affordable.
2. Understand Loan Types
While loan types differ around the world, here’s a look at how American loans function.
Federal Student Loans:
80% of loans to college students come from Federal Loans under the William D. Ford Federal Direct Loan Program. These include the following types of loans:
|Direct Subsidized Loans||
Repayments are only mandated upon graduation. The government will pay the interest while you are in school. The amount you can borrow depends on what year of school you are in, which increases each year of your undergraduate studies.
|Direct Unsubsidized Loans||
All the interest repayment is your responsibility. The amount of your loan will depend on your financial independence.
|Direct PLUS Loans||
Parents and students can take out PLUS loans. They have no maximum borrowing amount and come with a fixed interest rate.
|Direct Consolidation Loans||
Since many students borrow from different sources, a direct consolidation loan makes it possible to pay one servicer once a month. It offers a fixed-interest repayment schedule based on what you can afford, and direct consolidation loans may help reduce late fees if a payment is missed.
Private Student Loans:
Private loans are granted based on one’s credit score and income to assess if one qualifies. Since students often don’t have their own income or have not yet grown their credit score, private loans may ask for a co-signer, or someone who will guarantee loan repayment on a student’s behalf.
As a rule of thumb, it’s advised to first exhaust all federal student loans before borrowing from a private lender because interest rates are likely to be higher, there is no federal assistance, and the qualifications are more strict.
3. How Loan Repayment Works
Payments are at a fixed amount and all borrowers are eligible.
Payments start lower and gradually increase (as income is expected to increase).
Up to 25 years of fixed or graduated repayments.
Payments are 10% of discretionary income monthly. Payments are recalculated yearly based on your income. If you haven’t repaid your debts in 20 or 25 years in full, your loan is forgiven.
|Pay as You Earn||
Like a revised plan, except payment will be up to 10% of discretionary income monthly.
Payment is 10% or 15% of discretionary income monthly.
|Income Contingent Repayment||
Monthly payment will be 20% of discretionary income or what would have been repaid with a fixed plan over 12 years.
For up to 15 years, your monthly payments are based on your annual income.
4. Where to Get a Loan
Start your search with government loans. For example, in America, that would mean filling out FAFSA (free application for student aid). FAFSA collects student data and then the eligibility and scholarship options are delivered to students via their schools based on need. If it is enough to satisfy a student’s need, then they can opt for the loan.
If not, students also have the option to look into private loans. Private loans can be researched online, at banks, at credit unions and financial institutions.
5. Options to Avoid Loans
As mentioned above, online universities like UoPeople offer a lower cost alternative to traditional education that could dismiss the need for financial assistance.
|Apply for scholarships||
Scholarships are essential free money. See our guide here on the best ways to get a scholarship.
Some employers will help fund part or all of your tuition.
Studying part-time lowers the cost per semester and frees up time to work so that you can afford costs associated with education out of pocket.
Like part-time study, the potential of mixing part-time work and study means that you’ll be earning an income while you learn, so you can in theory, pay for some or all of school, depending on the type of institution you choose to attend.
Tools And Resources
Although the search for financial aid can seem daunting and stressful, you are not alone! There are many resources online and at your chosen school’s financial aid office that are there to help you.
- U.S. Department of Education Repayment Calculator
- Student Loan Borrower Assistance
- Loan Consolidation