Financial literacy: Preparing for student loans
Published: Monday, September 30, 2013
Updated: Monday, September 30, 2013 23:09
In last week’s column, I started talking about student loans and discussed some of the statistics on that topic. Most shocking to me is the fact that almost one in 10 students will default on their monthly payments within two years of graduating. With that in mind, it is crucial to stay ahead of the curve and be in a constant state of awareness when it comes to the money you owe and the amount of money you can expect to be paying per month after you graduate.
Going to the National Student Loan Data System (www.nslds.ed.gov) and clicking on “Financial Aid Review” is the primary step in figuring out the information. This is a government website, so do not worry when it asks you for your social security number or date of birth. The pin you require to log in is the same one you used when applying for the Free Application for Federal Student Aid.
Once you log in, the data is lined up for you in a clear, concise manner. The loans you took are listed in reverse chronological order, followed by the type of loan—subsidized versus unsubsidized being the most common types—the amount of the loan, the date the loan was disbursed, any actual outstanding principal and the outstanding interest. The same page also totals up all the information and gives you a short status summary, including your enrollment status.
The primary distinction to make here is the two main types of student loans. Most likely, logging in to the NSLDS will show a series of “Direct Stafford Subsidized Loans” and “Direct Stafford Unsubsidized Loans.” The main distinction is that the U.S. Department of Education pays the interest on a subsidized loan while you are either enrolled in school half-time or more, graduated in the last six months or if you have deferred your payments. Otherwise, you are responsible for paying your own interest. Both the interest rates are fixed at 3.86 percent for undergraduates and are accumulated monthly.
The default time to pay off a student loan is 10 years after graduating. This number can sometimes be changed through a series of choices such as a loan deferment or increasing the amount of years to pay off the cost, but such options usually lead to a significantly larger total amount of money paid off at the end of the loan. Unless paying the standard 10-year rate is truly difficult or impossible, I traditionally suggest staying away from methods of postponing.
For a rough estimate of the amount of money you will be required to pay your debt after graduation, simply look at the NSLDS’s “Total All Loans” section under “Outstanding Principal” and all the “Outstanding Interest.” This number is the payoff amount. If you divide this number by 10, you will receive an amount that shows annual payment amount. Divide once more, this time by 12, and you will see the monthly amount. Adjust this number by 3.86 percent, and you should have a good idea of what will be expected from you past graduation.
If the number comes out to be larger than expected, contacting the Financial Aid Office is a good idea. Writing a complete and comprehensive guide to managing student loans is virtually impossible due to the sheer number of private loans, scholarships, incomes and general situations available. Every student is different and every situation is unique, and there is no better alternative than consulting an expert. So take that first step, and get ahead of your loans. Understand their magnitude and long-term potential. This is stuff that will matter in the long run, and there is no better tool than preparedness.