Financial column: Understanding student loans
Published: Monday, September 23, 2013
Updated: Monday, September 23, 2013 23:09
Last week, I gave a presentation on credit to a class of roughly 20 individuals and was surprised to find that the majority did not know the specifics of their student loans. Furthermore, not one student was able to explain the difference between a subsidized and an unsubsidized loan. I did some digging and realized this trend holds true for students across all regions and colleges. A study conducted by Iowa State University released in May 2012 revealed that one in eight students with college loans do not actually know they have debt until they graduate. That is a very scary concept.
Understanding student loans is a tremendous topic and one I find incredibly important to comprehend fully. With such a large number of students not being aware of what exactly their loans entail, I have opted to split this column into two weeks—the first week will outline some of the data and facts to consider about student loans, and the second week giving more specific examples on how to manage your own debt and prepare for paying it off post graduation.
According to CollegeData (a great resource and a member of the National Association for College Admission Counseling) the average indebtedness of 2012 graduates from the University of Delaware was $33,649. Even with zero interest, that amount still comes out to more than $280 per month for ten years. This number is pretty close to the national average and may not seem like much, but consider the fact that 1 out of every 40 students graduate with a debt of more than $100,000. Chances are, you know several of these individuals who are going to be forced to pay more than $830 per month after graduation—and some of them may not even be aware of it.
With that information in mind, it may not be surprising how many students default on their federal loans. According to CNN Money, as of 2011, a shocking 9.1 percent of recent graduates defaulted on their monthly payments within two years of graduating. That number jumps up to 13.4 percent when you look at the first three years. Defaulting on a student loan has immediate negative consequences, including a major hit to your credit score, the loan being immediately due in full, the amount of your loan amount increasing due to collections fees and even wages from your job being withheld and sent to the government for collection.
Note, however, that a student loan becomes default if it is not paid for in 270 consecutive days. During that buffer period, your loan is considered delinquent and still harms your credit score severely, although other consequences are limited. The delinquency period should not be viewed or treated as “free” time to get affairs in order before a loan becomes default—it should also be avoided whenever possible.
Before next week’s column, I highly suggest going to the National Student Loan Data System (www.nslds.ed.gov)and clicking on “Financial Aid Review.” This government website provides a free look at all your student loans to date and breaks it up based on year, category and interest. Do not let yourself be surprised at how much you are going to be paying monthly—prepare for it.