What Every Young Man Should Know About Student Loans
Back-to-school time is once again right around the corner. Millions of recent high school graduates will be heading off to colleges and universities to fill their minds with knowledge and their bellies with ramen. New students are thinking about a lot of things what friends theyвЂ™ll make, what classes theyвЂ™ll take, and what itвЂ™ll be like being away from home for the first time.
What theyвЂ™re probably not thinking about, unfortunately, are the loans theyвЂ™ve likely taken out to pay for the education and experience that awaits them. This aversion is understandable the world of student loans is confusing, overwhelming, and seems disconnected from the present. ItвЂ™s something you can worry about in 4-6 years, right?
Wrong. Taking the time right now to understand how student loans work will save you money and headaches down the road. So if youвЂ™re a young gent (or the parent of one) whoвЂ™s heading off to college this year or next, we offer this accessible primer on the basics you should know about student loans.
If this info comes too late for you, as youвЂ™ve already graduated and are struggling with your student debt, later this week weвЂ™ll offer tips for paying it down.
Reduce the Amount You Need to Borrow
Before you consider taking out student loans, itвЂ™s financially prudent to find as many ways as possible to reduce the amount you need to borrow in the first place. The less debt you take on now, the less you have to pay back after college. ItвЂ™s hard to overestimate how much youвЂ™ll appreciate even a small reduction in your total debt later on, but trust me, someday you will.
Know that about 2/3 of all college students graduate with student debt, and the average debt is about $30,000. ItвЂ™s hard for a young man to put that into perspective, but when youвЂ™re repaying that loan, the average bill per month is about $320. When combined with other bills and debts, and especially when you get married, it will be a large chunk of your monthly budget. In fact, only about 60% of all student loans are being actively repaid at any given time; thisВ means that just under half of all borrowers canвЂ™t afford that monthly payment (and failing to pay has dire consequences which we ll discuss next time). These are just numbers, of course, but are sobering nonetheless, and hopefully give some credence to the reality of student loans and the necessity of reducing them as much as you can.
Save for college. Sure, youвЂ™re probably not going to be able to save enough money from your high school job to pay for the entirety of your college education, but every little bit helps. So get out there and get a job. Use some of that money for fun, but be sure to set aside a chunk for school.
If youвЂ™re a parent with young children, start thinking ahead by opening up a 529 account with your state to save money for your kidвЂ™s future education. Contribute a little bit each month. The money you contribute is taxable, but it grows interest-free. Also consider asking family members to contribute as Christmas and birthday gifts, especially early on when Junior wonвЂ™t know the difference anyway.
Apply for scholarships. I wish I sought out more scholarships when I was applying for my undergraduate degree. I think I applied for like five, and I ended up getting one for a few hundred dollars. But I had only scratched the surface there are literally thousands of opportunities out there. DonвЂ™t just apply for the scholarships that your school offers a lot of organizations have scholarship funds available, and in many cases that money doesnвЂ™t even get dispersed because no one ever applies for it. Thanks to the internet, hunting for scholarships is a breeze. Search these sites for scholarship opportunities:
Once you put together a big list of scholarships, dedicate a few hours each weekend to submitting the applications. Sure, itвЂ™s tedious and boring, but if you can score a few thousand dollars to go towards your tuition, itвЂ™s completely worth it.
вЂњMoneyballвЂќ your way through college. Last year AoM guest contributor Jay Cross published an article on how to use CLEP exams to reduce the amount you pay in college tuition. The tests cost just $80 each, but if you pass, you donвЂ™t have to take that class in college, saving yourself hundreds or thousands of dollars.
Coupling CLEP exams with taking AP classes (and passing the exam) in high school is another effective way to save big-time money and months of your time. Using a combination of AP exam credit and CLEP exams, I was able to shave off a whole year of college. It was awesome!
Go to a community college the first two years. If you canвЂ™t CLEP out of some of your general ed requirements, consider attending a local community college for the first two years of your schooling. Sure, youвЂ™re not getting the вЂњfull college experience,вЂќ but youвЂ™ll save a lot of money.
Live at home. My first semester of college I lived in the dorms at OU. It was a blast, but my grades suffered, and it cost me several thousand dollars. At the end of the semester, I decided to transfer to a college in my hometown and move back in with my folks. The tuition was much cheaper, plus I saved a ton of money on living expenses. And as a bonus, I had a 4.0 my second semester.
If itвЂ™s an option, consider living with your folks while youвЂ™re in college. Sure, theyвЂ™ll cramp your style some, but youвЂ™ll be amazed at how much money youвЂ™ll save and how much more productive youвЂ™ll be.
DonвЂ™t take the full amount of student loans offered you. Before school starts, youвЂ™ll get a letter telling you how much in student loans youвЂ™ve been approved for. You donвЂ™t have to accept the full amount. Take a look at your whole financial situation and decide how much you need to make it through the college year. Many students take the full amount and use whatвЂ™s left over after tuition and books as spending money. But if you work while youвЂ™re going to school, you wonвЂ™t need to do that. Which brings me to my next pointвЂ¦
Work your way through college. Yes, school should be your top priority. But with efficient use of your time, you can make room for a part-time job. I waited tables and made smoothies throughout college. And most schools offer on-campus jobs that are pretty easy to get, and of course flexible with your class schedule.
Because I had money to pay for my living expenses, I didnвЂ™t have to take the full loan amount I was offered each semester. I typically just took enough to cover my tuition and books, and I saved thousands of dollars because of that.
Understand the Two Types of Student Loans
So youвЂ™ve done all you can to reduce the amount you need to borrow, but you still have to take on some loans.
Student loans will come in two broad categories: federal student loans and private loans. With federal student loans, the U.S. government is your lender. Thanks to various laws, money lent by the government comes with provisions to help you manage your student debt, such as fixed, relatively low-interest rates, grace periods, and flexible repayment plans.
With private loans, a bank or some other institution is your lender. The company you borrow the money from sets the rules on repayment and theyвЂ™re not as generous as Uncle Sam.
To help you navigate the various types of student loans out there, weвЂ™ve created this handy-dandy chart:
Determining Your Eligibility for Federal Student Loans
To be eligible for any federal student loan, you must meet a few baseline requirements. Most are what youвЂ™d expect: graduate high school, be enrolled or accepted to an accredited college, have a valid Social Security Card.
The one eligibility requirement that I didnвЂ™t know about and that is unique to men is that you have to be registered with the Selective Service if youвЂ™re between the ages of 18 and 25. Uncle Sam wonвЂ™t give you any loans unless youвЂ™re willing to be drafted into World War III.
If you meet the above requirements, then you just need to fill out and submit a Free Application for Federal Student Aid (FAFSA). You can submit applications for the fall semester after January 1. The earlier you submit your FAFSA application, the better. It takes awhile to fill out, so look to set aside about an hour if youвЂ™re a first-time applicant.
When Do You Have to Start Paying Back Your Student Loans?
With both federal subsidized and unsubsidized student loans, youвЂ™re a given a six-month grace period before youвЂ™re required to start paying back your loan. The grace period starts after you gradate, leave school, or drop below half-time enrollment. Just remember, with unsubsidized student loans, youвЂ™ll be accruing interest during your grace period and the interest will be added to your total principal. With subsidized loans, the grace period is interest-free.
When it comes to student loans, a little knowledge goes a long way. Do what you can to reduce the amount you borrow, understand the nature of the loans youвЂ™re taking, and start thinking now about how youвЂ™ll pay them back after you get your sheepskin.
If youвЂ™ve already graduated and are having trouble making your loan payment, on Thursday weвЂ™ll offer you some tips on paying back that debt.