Wednesday, April 10, 2013

College Loans

My kids are nowhere near college, but I think about college once in a while.  Mostly I think about it when I listen to friends talk about their children's applications to college and attending college.  I also think about it when I listen to college grads talk about their loans.

There was an article in the Baltimore Sun about financial aid packages this year.  Many schools have added a disclaimer to the financial aid packages they've been sending out this year.  The disclaimer is something about funds subject to change.  The increase in disclaimers is because of the federal budget's situation and sequestration.  There has been an added uncertainty to colleges' ability to guarantee loans this year.  

As my husband and I have juxtaposed the amount of loans colleges are offering to students for one year's attendance beside the reality of the job market today, we have become more and more aware of the challenges young people face.

An interesting thing came up the other day in a discussion with a friend about how to pay off college loans.  I did not have college loans, but my husband did.  When I went through grad school, I lived on a shoe string budget and attended a program I could afford.  I used a small savings account I had to pay for one year of my tuition.  And I worked.  I substituted, worked a second job for the church I attended, and housesat whenever I had the opportunity.  I had this strong conviction that I needed to make it through grad school without debt.

In our culture, it has become an accepted way of thinking to live with debt.  Debt beyond a mortgage and car payment.  

What does having debt do?  It locks up your budget.  It obligates you to paying certain amounts each month--usually for a long span of time.

Someone told me that a lot of folks are now giving the advice to grads with loans to just pay the minimum on their student loans.  Hmmm...  I wondered the reasons why when I heard it, so I googled "college loan repayment advice minimum payment".  I read several articles and gathered that financial advisers are giving the advice to pay the minimum and instead:  save a buffer first, then put some aside for retirement, start an IRA, pay off credit card debt, invest--and then pay off your loans.  Really?  I read a few more articles and found the advice is pretty mixed.  Some folks say pay them off fast, some don't.

What I noticed is that the articles who advocated putting off paying student loans didn't mention a few things.
#1  They didn't mention how monthly payments lock up your budget and can make it much less flexible to cope with emergencies and life changes.
#2  They didn't mention the stress of living with debt.
#3  They didn't mention that it's hard to get an investment that will pay more than you owe in interest nowadays.
#4  They didn't mention that if you marry after graduation and you both have debt, your burden grows.  It doesn't shrink.

In my mind, I have always thought it a good idea to pay off student loans faster.  Loans are a burden that can lock up your budget.  I couldn't think of an exception.  But, I learned about one today.

In the case of some service sectors like medicine where loans are astronomical, students take out their loans with the understanding that if they pay the minimum for 25 years, then the rest of the loan will be cancelled out.  The minimum payment is a percentage of their income.  In the case of some, these loans can never feasibly be repaid unless the former student comes into an enormous windfall of funds.  

I asked the friend who explained this to me what they thought of other student loans.  The person explained that their friends are all paying off their loans ahead of schedule.  If it wasn't for the cancellation after 25 years, he/she likely would do the same thing.  But, it simply isn't realistic to do so.  

I think I'm on the same page as Dave Ramsey.  I was just on his website and his step #1 is to build a $1,000 emergency fund.  #2 is to pay off all debt, excluding your house.  His tip is to pay off the smallest loan first--and I would say the same thing.  Pay off the smallest college loan first.  Then, move on to the next.  There's a sense of satisfaction and a feeling you can do it once you get one loan paid off.  

My husband and I found ourselves in this situation a few years ago.  Because of vehicle purchases and emergency house repairs, we tightened our belts and worked hard at paying off that debt.  God was so gracious and provided the means to do that.  But, that experience has made me not want to end up with several loans again if I can help it.  

I worry about college students who are taking out huge amounts of loans today and what it will mean for their lives in the future.  I know I shouldn't worry, but I do.  Debt may be invisible, but it's still carries a lot of weight around with it.

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