Category Archives: Student Loans

Where do Massive Student Loan Balances Come From?

Education is a good investment, and assuming some debt to earn a bachelor’s or advanced degree tends to pay off for most. For example, a student who took out the maximum direct student loan each year for four years would pay a little over $300 per month for 10 years to fully repay their loans. The average salary for a recent college graduate is over $51,000, and the Bureau of Labor Statistics shows median weekly earnings for bachelor’s degree holders being $461 higher than the median for those with only a high school diploma and unemployment rates 2% lower. So someone who borrowed the federal direct loan limit can reasonably expect to make up their loan payment every week just out of the salary differential.

That’s all well and good, but many Americans have much higher loan balances than that. Where does all that debt come from? The average loan balance upon graduation for the class of 2017 was over $39,000, and more than 2 million borrowers owe over $100,000 on their student loans. A large portion of those are people who attended graduate school, especially in medicine and law. And there are a number of borrowers who borrow larger amounts through private loan programs. But many find themselves with growing post-college loan balances due to deferrals or forbearance plans where interest accrues on the loan while nothing is being paid. Here’s how that works:

Let’s suppose you borrow the maximum direct student loan every year, and it’s completely unsubsidized (interest accrues on the full loan balance while you’re in school). Your $5,500 freshman year loan, at this year’s interest rate of 5.05%, would have a balance of $6,611 upon graduation. Calculating four years of loans, the $27,000 borrowed would have an added $3,232 in interest tacked on (at this year’s interest rate), bringing the loan balance up to $30,232. College graduates then have a 6-month grace period during which they’re not required to make payments. Doing so would add almost $700 to the loan balance, bringing it to $30,914. Even so, the monthly payment would remain in the low $300s range.

But what if that graduate went on to graduate school and continued deferring their loans for another two years? Sallie Mae’s Accrued Interest Calculator shows another $3,053 in interest accruing on the loan– $3,817 if the student takes advantage of the grace period following grad school– not to mention the likely scenario of additional borrowing to finance that additional education.

Forbearance makes sense in some circumstances, such as attending graduate school. However, a recently-released report shows that student loan servicers such as Navient are steering college graduates into forbearance when other repayment options such as income-driven plans might be better choices. Under an income-driven repayment plan, the borrower’s payment is capped at a factor of their income, recalculated annually. In some cases, when the payment is lower than the monthly interest on the loan, the additional interest may be subsidized by the federal government for up to 3 years. This means that the loan balance doesn’t grow as long as the borrower makes payments.

Limited borrowing to pay for college can make a lot of sense, but students and families need to be cognizant of the total borrowing over four years and what the loan balances will look like upon graduation. Then, it’s imperative to inform yourself about the repayment options before getting into one. This is especially true with interest rates rising and loan costs going up as a result.

College Prep by Grade

I gave a financial aid talk to college and career center volunteers at our high school recently. One question stood out: “This is a lot of information to absorb at once. Can you break it down into some specific suggestions by grade?” Two ideas are important here: College planning is a process that should start well before senior year, and there are things that can be done at any point to make things go more smoothly when the time comes to start applying. So here goes. Continue reading College Prep by Grade

Estimating Post-Graduation Loan Burden

For many teenagers, it’s difficult to understand the true burden of student loans. For someone whose primary source of income has been mowing lawns, the average college graduate starting salary of over $51,000 often seems a little bit like winning the lottery. Unfortunately, it also leaves many feeling like student debt will be no problem. Variations on the theme of, if I’m making $50,000 a year, it won’t take any time to pay off $50,000 in student loans, abound. However, the facts are somewhat different: all-in, Continue reading Estimating Post-Graduation Loan Burden

Why File the FAFSA?

Every year, a large percentage of the eligible population fails to file a FAFSA: the Department of Education estimates 40% of high school seniors do not file it and 25% of college students do not renew their FAFSA. And yet, there are plenty of compelling reasons to do so. The obvious one is access to financial aid. Here are some other reasons: Continue reading Why File the FAFSA?

FAFSA for Divorced Parents

This is a big topic so for today I’m going to focus on general rules. Keep in mind the FAFSA rules are different from the CSS Profile rules; below is FAFSA only.

The custodial parent for the FAFSA can be different than the custodial parent in the divorce decree and/or different from who claims the student as a dependent on their tax return. The FAFSA defines the custodial parent as “The parent that you lived with most Continue reading FAFSA for Divorced Parents

Long Term Student Loan Default Rates

Schools are required to publish a Cohort Default Rate (CDR), a useful but limited statistic showing the default rate of student loan borrowers from that school. Why is it limited? Because data is limited to federal loan programs and to students within three years of graduation. That tends to omit two groups of students with a higher-than-average likelihood of defaulting: students who are in forbearance programs– not making any payments due to financial hardship– and private loan borrowers. Fortunately, TICAS provides a broader look at student debt. Continue reading Long Term Student Loan Default Rates

EFC, Net Cost and Aid Packaging

Step 1 in figuring out how to pay for college is estimating your EFC. You can use the FAFSA4caster, or the more detailed EFC Formula Guide (note that’s for 2018-2019; the 2019-2020 version should be released this month). But EFC is just a starting point: schools aren’t required to meet your need, and they certainly aren’t required to meet it through gift aid. That’s why net cost and aid packaging are important concepts to understand. Continue reading EFC, Net Cost and Aid Packaging

Need-Blind, No Loan, 100% Need Met Policies

On our recent college odyssey, we heard about a lot of need-blind admissions policies, and no loan/100% of need met financial aid policies. These are mostly good things but perhaps not as good as they sound on the surface, so it’s worth unpacking them. Continue reading Need-Blind, No Loan, 100% Need Met Policies