FedLoan Servicing is Terrible: Part III

I'm starting to think that this is going to be a never ending saga! I arrived home yesterday to find a letter in the mail from FedLoan Servicing about my payment for this month, so they now have even more surprises up their sleeve for me! My payment for this month is now just a grand total of $113.16 due on 08/21/2013. I'm completely shocked - I literally do not know what to say. Before I even researched this I had a gut feeling it wouldn't even be enough to cover my interest and sure enough it proved to be right later on. My previous minimum payment was $343 and you see all the problems I am having with that, how is this payment going to solve anything?

If I total my accrued interest on all my loans as of today, I come up with:

$8.43+$14.79 +$15.38 +$8.98 +$26.33 +$9.51+ $26.52 + $14.85 = $124.79 in unpaid interest

That means that by the time my payment is even due, that will be closer to $200. If I make that $113 payment it will just cause my loans to increase and that interest will be added to the balance of my loans. It seems like instead of a 10-year payment plan that FedLoan Servicing has me on the 'forever' payment program. Aren't there rules against minimum payments being this low and having loans just constantly accrue interest? It doesn't seem fair, and if someone was only making minimum payments and not paying attention they could really get screwed over here.

I'm going to try and use their annoying formula to calculate my minimum payment on one of these loans:

M=P/[[(1/(1+O/P)) X (1-(1/(1+I/12)T))]/[(1-(1/(1+I/12)))]]

 Where M= Monthly Installment, P= Principal Balance, I= Interest Balance, O= Outstanding Interest, T= Total Number of Installments (120 for a 10 year repayment plan)

M=5200.81/[[(1/(1+15.38/5200.81)) * (1-(1/(1+15.38/12)120))]/[(1-(1/1(1+15.38/12)))]]

Unfortunately I'm not really sure what the difference between outstanding interest and interest balance is. To me that would be the same thing on these loans? Outstanding interest is the only thing I can seem to find on their website. It's obviously something else because I get my monthly payment to be $129 which does not make any sense. I think I will have to ask them about that.

When I went to reference some of my payments though, I realized that some loans don't actually have a monthly payment though! It seems like they have just arbitrarily decided to decide the monthly payments each month on which loan should be paid and which shouldn't:

As you can see, one loan actually has a monthly payment while the other loan does not even have a monthly payment due! Yet interest is still accruing on it. And not to mention that neither loan has a next due date according to this section of their website. Once again I'm starting to get that strange feeling that I'm on the 'forever' payment plan and that something weird is going on here. I absolutely plan on calling them either today or tomorrow in an attempt to figure this out.

Does anyone have any idea what is going on here? Am I reading into this wrong?

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Posted in Student Loans

FedLoan Servicing is Terrible: Part II

I honestly still have no idea how FedLoan Servicing calculates how payments are distributed between loans, but I'm definitely trying to figure it out! My frustration with FedLoan Servicing grows as I'm still unable to find the information I'm looking for or at least some explanation of why my $600 payment (which was $257 over the minimum payment) was not able to cover all the interest. Well technically it was, but FedLoan Servicing had other ideas with it.

I received an e-mail response from FedLoan Servicing through their secure 'contact us' system and I will say that the responses were pretty much received within 2 business days. They used the full amount of time but they did respond to me. I received mostly generic responses ranging from just saying how the payment system worked, how interest is calculated, etc etc.

I did receive two responses that did attempt to answer my question but still pretty much ignored the major point of the issue. Their website states that "Any interest or fees that have accrued on your loans will be paid first before reducing your principal balance" like I had said before but they seem to ignore this issue in each response, and they are definitely ignoring the fact that I paid $0 into principal on two of my loans.

On my most recent response I'm not really sure what to make of it. They gave me a nice, simple formula that is used to calculate how much each loan payment is:

M=P/[[(1/(1+O/P)) X (1-(1/(1+I/12)T))]/[(1-(1/(1+I/12)))]]

Where M= Monthly Installment, P= Principal Balance, I= Interest Balance, O= Outstanding Interest, T= Total Number of Installments (120 for a 10 year repayment plan)

So if M is the monthly installment, that's just how much I have to pay each month? That's not really helpful to me - I paid way over the monthly installment for each loan. I'm trying to figure out how they divided each payment and how they decided to give smaller loans more money and larger loans less money. The monthly installment for those loans is in fact smaller, so I'm not sure why the extra money wouldn't be weighted in the same way?

They also tried telling me that any extra money I put towards my loans in July would contribute to a payment in August. So basically any extra money is only pre-paying the next month - which is annoying. I wanted to pay extra in that month, not just pay in advance. Nowhere on their website does it state that when making a payment. I've sent another response to their support, but it really looks like I'm going to need to get on the phone with them and see if I can get anything sorted out. This is getting a bit ridiculous I think!

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Posted in Student Loans

FedLoan Servicing is Terrible

If your student loans happen to get bought by FedLoan Servicing I have one word of advice for you: run! Run far, far away! But you probably have the same stories about your loan servicing company, so is there anywhere you can actually run to? It has been nothing but headaches since I first found my loans were being bought by them from Direct Loans.

The first thing that happened was that I logged into my Direct Loans account and realized that I suddenly had all my loan balances at zero. At first I thought I might have been the lucky winner of a computer glitch or some kind soul had decided to pay all my loans in full. After about 30 seconds, I remembered reading about this several times before. I knew my loans had been sold to another provider. The question was, who?

The next day I received a letter in the mail learning that my new provider would be FedLoan Servicing. Seemed like a pretty standard name and company, and what was the big deal? That was the last time I would think that about them. I signed up for an account with them using my Social Security number and other information, but for some reason I had no loans in my account and my payment was supposed to be due in a few days.

I filled out the contact us form asking about my accrued interest as well as my loans not showing up and when I would have to make a payment. I received a generic response that it could take up to 15 (!!) business days to process the transfer of my loans and that I wouldn't have to make a payment until 7/21 instead of my 6/21 payment. They dodged the interest part of my question, but that was whatever at that point.

So then the time came for my 7/21 payment, and I realized that interest HAD been accruing the whole time. Two of my loan balances are actually higher than the started out. That is partially my fault from the time with Direct Loans, but I had corrected that by paying extra the next time. But now they had gone right back up to where they were before and then some.

I decided to make a $600 payment on my minimum payment of $343. I figured that should clear all the extra interest no problem and reduce the principal a little bit in each loan. I would start from a "clean slate" since I was making great progress with my private loans and this just didn't seem worth the headache to deal with.

Fast forward to a few days ago where I decided to just review my payment, as that took a few business days to process itself. When I looked at the results I was absolutely stunned and I could feel my blood pressure rising instantly! It seems that they had largely decided to arbitrarily put my payments however they felt it - there was no weight based on the size of the loan, and they ignored the accrued interest. The payments weren't even spread out evenly!

(Note: I'm totally a dude, but this picture perfectly sums up my feelings right now)

A direct quote from their website is: "Any interest or fees that have accrued on your loans will be paid first before reducing your principal balance" but apparently this only applies when this is in their interests, like when the other loan has a lower interest rate. They would rather let the higher interest rate keep accruing interest and not even touch the principal.

Here is an example from part of my payment last month:

Loan 1: Balance: $3,322.53
Here is the last payment I made on this loan:

Loan Type	Principal Paid	Interest Paid	Late Fee
DIRECT SUB STAFFORD LOAN	$31.61	$50.91	$0.00

Loan 2: Balance: $4,312.47
Here is the last payment I made on this loan:

Loan Type	Principal Paid	Interest Paid	Late Fee
DIRECT SUB STAFFORD LOAN	$0.00	$48.24	$0.00

As you can see, the second loan balance is actually higher than the first, yet nothing reached the principal. I have even smaller loan that they decided to put $120 total towards and another loan that had $0 principal paid as well as the one above. Both of those loans still had unpaid interest, yet here their system was putting $31 towards the principal on this loan and $70 on another and then paying just a portion of the interest on another loan. This is not how they say their payment system is supposed to work!

I have submitted two requests through the contact us form, but I will absolutely be amazed if I receive anything more than a generic response. The form says that they will respond within 2 business days, and tomorrow will be around 3 so I should probably get a response by tomorrow.  It seems like I'm going to have to waste time on them with the phone and probably get told they can't fix payments that have already happened. I apologize if this entire post sounds too rant-y in advance, but I don't like these shady business practices that FedLoan Servicing is pulling on me here.

Has anyone else had similar experiences with FedLoan Servicing or even any other student loan servicer?

Photo credit: Don Hankins / Foter / CC BY
Photo credit: Evil Erin / Foter / CC BY

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Posted in Student Loans

New Student Loan Agreement on the Horizon

It seems like Congress is finally closing in on an agreement to and while it doesn't solve the underlying problem (the easy source of money giving colleges an incentive to keep increasing tuition), they claim it will solve the problem of certain interest rates jumping from 3.4% to 6.8%.

This agreement will tie the interest rates to the market rate, or the 10-Year Treasury note plus 2.05% in interest rates which should set the rates at 3.85% [1]. At face value this seems fair, but I personally think it should really be a 1% increase over the 10-Year Treasury. The less graduates are paying on interest, the more money they can potentially spend in the economy sooner - things like cars and houses. Someone making large monthly payments towards student loans are highly unlikely to be getting a mortgage anytime soon.

The interest rates would be capped as well at 8.5%, 9.5%, and 10.% for undergraduates, graduates, and parents respectively. It would be nice if these caps were lower, but at least students will be paying the "market" rate instead of 6.8% while mortgages are at an all time low. If the Fed continues to keep interest rates at all time lows, student borrowers in the near future should be able to hang onto these low rates.

The part about this plan that I don't like is the fact that students are being used for profit by the government. It already sucks that private loan companies exist to do this, but hey that's what business is designed to do right? The federal government should not be doing that! The aim for this program, in it's current existance, should absolutely to be to break even or make minimal profit as a buffer.

This will generate about $184B in revenue for the federal government, coming directly from students. There will also be an estimated additional $715M in revenue that is specifically going to be used for reducing the deficit [2]! Due to Congress' own stupidity, they are going to be using us to pay for their budget mistakes from the same people they should be investing in - not taking from. Maybe Congress should stop wasting our money first before taking more money?

I guess we will have to wait and see what Congress ends up doing and if this plan actually does get approved. Unfortunately for future students I think it may take the Student Loan bubble bursting for the actual source of the problem to be solved.
Photo credit: Nastassia Davis [www.nastassiadavis.com] / Foter / CC BY-NC

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Posted in Student Loans

Student Loan Progress - July 2013

As I was preparing to write this post, I was starting to feel a little burnt out about my debt again. But I have to realize that I'm making progress and keep pushing towards my goal to be debt free. I'm treating it like like as much of an emergency as possible with every last dollar going towards my goal! Since I've started this blog I'm doing much better and trying to put a minimum of $2,000 towards the loans each month.

This is where I stood at the end of June:

Loan	Loan Amount	Interest Rate
Private 1	$ 26,053.92	7.92%
Private 2	$ 19,971.82	7.92%
Private 3	$ -	7.92%
Private 4	$ 3,532.69	7.35%
Gov 1	$ 22,118.82	5.22%
Gov 2	$ 7,566.56	6.80%
Total	$ 79,243.81

You may remember that I was a little disapointed that my government loans had switched providers, so I was not able to make any payments on them last month. This led to me only putting $1,500 towards my private loans when in reality I could have put a full $2,000. I also thought my expenses would be higher last month with my camping trip, but I think they will actually up being high this month. Go figure!

Here are the payments I made for July:

Loan	Loan Amount	Change	Interest Rate
Private 1	$ 24,485.37	$ (1,568.55)	7.92%
Private 2	$ 19,919.49	$ (52.33)	7.92%
Private 3	$ -	$ -	7.92%
Private 4	$ 3,506.12	$ (26.57)	7.35%
Gov 1	$ 3,773.04		3.40%
Gov 2	$ 3,309.66		6.80%
Gov 3	$ 5,200.81		4.50%
Gov 4	$ 2,010.27		6.80%
Gov 5	$ 5,270.84		5.60%
Gov 6	$ 2,129.04		6.80%
Gov 7	$ 4,312.47		6.00%
Gov 8	$ 3,322.53	$ (356.72)	6.80%
Total	$ 77,239.64	$ (2,004.17)

As you may have noticed, my new provider has now split all my government loans up individually. I'm not sure if this is a good or bad thing, but may be more helpful in the long run. I'll be able to target each loan individually in order of highest interest rate and it will be more of a psychological victory as I eliminate each one.

I paid about $2,500 in total towards my loans this month. I'm still working on completely paying off Private Loan #1 and I'm slowly making progress on that. The $356 you see for the government loans is in total, next month I will be able to show each individual loan. The $2,000 towards the principal was good progress compared to last month. Hopefully next month will bring more of the same!

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Posted in Student Loans

A new way to approach student debt?

It looks like Oregon is on it's way to attempting to solve the student loan crisis in their state. But just how feasible is their solution? The basic concept of the plan is that you would not receive any traditional loans and you would not pay any tuition. You heard that right: no student loans. What you would do upon graduation is pay the University 3% of your income for 25 years. Essentially it would put everyone on an income based repayment plan that you currently get through federal loans.

I definitely agree with this program in principle, but I think it needs a few modifications for it to actually succeed. Let's look at a few examples of how much each person would be paying over the course of those 25 years:

30,000 Salary: $22,500
50,000 Salary: $37,500
75,000 Salary: $56,250
100,000 Salary: $75,000

As you can see, obviously the higher salaries would be "subsidizing" the the cost of lower paying degrees and you know what? I'm actually OK with that with a slight modification. If you are able to pay more than the 3% of your income, you should be be able to pre-pay your "loan" amount up to a certain max amount. Maybe something like the cost of tuition + $1,000 to cover any extra expenses? That would seem pretty fair to me.

You may also argue that students would not be motivated to pursue higher salary jobs because they would pay more back, but I think that is what the payback cap would be if you start to pre-pay your loan back instead. We also don't see the increase in taxes really stopping anyone from taking that $100,000 salary job compared to the $50,000 salary job.

If we use the example of Oregon State University, the cost to attend in 2013-14 in Tuition and fees is $8,538. So that means over the course of 4 years your total would be $34,512+$1,000. That means that everyone making over $50,000 a year would most likely want to pay more than the minimum. You would obviously have the choice of what to do, and for people making less they would still be able to use the IBR method to pay a lower total amount.

The only thing that it seems may be a problem is with the program itself, and how the funding will work. Australia already does a similar thing, so there must be some way to make this work! If we assume that there are about 4000 freshman entering Oregon State University each year the costs for the state would rise very quickly.

Year 1: 4000 Students * $8,538 = $34,152,000 Cost
Year 2: 8000 Students * $8,538 = $68,304,000
Year 3: 12,000 Students * $8,538 = $102,456,000
Year 4: 16,000 Students * $8,538 = $136,608,000

Total cost: $341,520,000

So the total cost at this one university before they even begin receiving a cent of income from the program would be around $341 million! I didn't even factor in people not completing their degree or dropping out - and what do you do to them? Still charge them 3% over 25 years or until they pay back how much they were "loaned"? Those are more rules and situations that Oregon would also have to account for.

The other side of the program, or the income assuming that the average student graduating with a bachelor's degree will make $40,000 a year.

$40,000 Salary * 4000 Students * 3% = $4,800,000 Income/Year

fast forward 4 years to when they are making the "full amount" each year...

$40,000 Salary * 16,000 Students * 3% = $19,200,000 Income/Year

and then 24 years later when they have the "maximum" amount of students paying...

$40,000 Salary * 96,000 Students * 3% = $115,200,000 Income/Year

So while the school would technically be able to break even on a per-student basis, it would probably take many years to actually generate a positive cash flow (if they even do?) and that is a huge, huge cost upfront. You also have to take into account students that become unemployed, or students that eventually leave the workforce to start a family. Obviously there would be a lot more complex calculations going into this, but I like the sound of this program at it's face value with a few tweaks. I'll leave the technicalities and funding to someone much more knowledgeable on the program than me!

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Posted in Student Loans

Student Loan Progress - June 2013

Another month, another round of student loan payments. Unfortunately this month ended up being a little strange in my student loan payments, due to circumstances beyond my control. I was not able to put as much money towards my loans as I was expecting. But first I'm going to start off with where I left off last month so you can get a frame of reference.

May 2013:

Loan	Loan Amount	Interest Rate
Private 1	$ 27,131.22	7.92%
Private 2	$ 20,037.32	7.92%
Private 3	$ -	7.92%
Private 4	$ 3,561.09	7.35%
Gov 1	$ 22,118.82	5.22%
Gov 2	$ 7,566.56	6.80%
Total	$ 80,415.01

Here's what my loans look like this month after my payments were made in June:

Loan	Loan Amount	Change	Interest Rate
Private 1	$ 26,053.92	$ (1,077.30)	7.92%
Private 2	$ 19,971.82	$ (65.50)	7.92%
Private 3	$ -	$ -	7.92%
Private 4	$ 3,532.69	$ (28.40)	7.35%
Gov 1	$ 22,118.82	$ 0	5.22%
Gov 2	$ 7,566.56	$ 0	6.80%
Total	$ 79,243.81	$ (1,171.20)

As you can see from the above, I have started to tackle Private Loan #1 as my next big target, but not quite as much as I would have liked to this month. I set up an auto-payment ahead of $1500 towards my three private loans ahead of time. This was because it was due when I was on vacation. I didn't want to put too much because I was unsure of what my expenses would look like this month. In hindsight, I definitely could have bumped it up this month but I guess I can do that next month instead.

You may have also noticed that I did not make any payments towards my government loans this month, which is one of the reasons things were beyond my control. That would have been another ~$400 or so, bringing me close to $2000 total for the month. Unfortunately it did not work out this way because for the 2nd time in a little under a year - my government loans have been sold to a different provider! Apparently nobody wants to take my money from me? They can really pay it off in full if that's what they want...

But I did receive an e-mail that my loans had been transferred to http://myfedloan.org/. Previously I had been using www.myedaccount.com, and I forgot the name of the one that my loans started out with. I received that e-mail on June 11th and they told me it can take up to 15 business (!!) days for my loan to transfer and show up. I'm going to hate to see how bad the interest on my loans look like once this is finished processing. After screwing up the payment last month, and now over a month of interest accruing it will not be pretty. Needless to say, I'm still waiting for the loans to show up. They were shown as fully paid on my previous account right away on the 11th, so not sure what the hold up is here. I also have no idea when this new payment will be due, but I'm hoping that it is later in the month like it was on the previous website.

The only advantage that I'm going to be enjoying is that this new loan service does provide a 0.25% interest rate discount if you set up an automatic debit. I plan on setting up automatic debit that is slightly higher than the minimum payment, as long as it does bring the principal down. If not I will configure my own "minimum" payment to do exactly that. This will be helpful as I continue to put the majority of my money towards my higher interest private loans.

Here's to hoping that next month brings more significant progress and less confusion!

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Posted in Student Loans

A Note on Student Loans

 A few weeks ago I had wrote a post on the current state of interest rates in the student loan market, and right now I wanted to do a follow-up post on that. We are quickly approaching the July 1 deadline for student loan rates (from the government) to all jump to 6.8% if Congress does not act by then.

There are several plans outlined, but I wanted to highlight Elizabeth Warren's plan in this post. I recently came across a petition for supporting Elizabeth Warren's plan started by her. At the time of writing this, the petition has over 450,000 (!) signatures on it. While I may not fully agree with her plan, I think her method of attacking it and bringing the issue out into the open is the important part here.

If we can show Congress how important this issue really is by getting as many signatures as possible on this petition, I think it could really spark a debate or at least get the news talking more about this. I know that sometimes online petitions have a bad rap, and many times they are ignored - but in this case Senator Warren plans to deliver the petition to Congress.

You can sign the petition right here:
http://pac.petitions.moveon.org/sign/give-students-the-same

Photo Credits for this post: Mother Jones

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Posted in Student Loans

Student Loan Progress - May 2013

For some reason I was looking forward to making progress on my student loans this month, instead of just hiding from them. I couldn't wait to throw a huge amount of money at it, and show you and myself that progress can be made and that progress can hopefully be made quickly too. Now don't get me wrong though, I definitely was not looking forward to the parting with my money!

Let's dive right into the numbers and see what I did this month. First I'll start with what my loans looked like last month:

April 2013:

Loan	Loan Amount	Interest Rate
Private 1	$ 27,220.04	7.92%
Private 2	$ 20,097.38	7.92%
Private 3	$ 3,067.54	7.92%
Private 4	$ 3,588.77	7.35%
Gov 1	$ 22,041.66	5.22%
Gov 2	$ 7,704.42	6.80%
Total	$ 83,719.81

Here's what they look like this month after my payments were made this month:

Loan	Loan Amount	Change	Interest Rate
Private 1	$ 27,131.22	$ (88.82)	7.92%
Private 2	$ 20,037.32	$ (60.06)	7.92%
Private 3	$ -	$ (3,067.54)	7.92%
Private 4	$ 3,561.09	$ (27.68)	7.35%
Gov 1	$ 22,118.82	$ 77.16	5.22%
Gov 2	$ 7,566.56	$ (137.86)	6.80%
Total	$ 80,415.01	$ (3,304.80)

I made a huge payment this month, taking some money out of my huge emergency fund and I plan to do that again next month. I'll break down exactly how much I paid and how much I took out of my savings account when I fully complete my monthly spending and budget. I completely eliminated Private Loan #3 and it felt really good to see one of my loans change its status to "paid in full". It was a good psychological motivator to pay it in full and it was also one of the highest interest rates, so it sticks with my avalanche payment plan.

I'm also a little a lot pissed off at the government loan minimum payment being set lower than what even covers the accrued interest. I've never made a minimum payment before, but with my new strategy of targeting the higher interest loans first I decided to do that and put all the extra money towards higher interest ones. I guess I will have to be more careful from now on, but I still took a loss of $77 on that which annoys me. Imagine someone that can only afford to make the minimum payments each month and they are making zero progress? At least there are income based repayment programs for government loans, though these can pretty much make the loan last forever.

The next step for me will be to completely pay off either Private Loan #1 or #2, though I'm not sure which one I'll be targeting first. They both have the highest interest rates remaining so I want to get them out of the way as fast as possible. I think I might go for #1 first, so that when I do finally finish paying that one off the 2nd one wont really seem as big.

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Posted in Student Loans

Recent Student Loan Developments in the News

Recently there have been some developments regarding student loans in the news dealing with both the current and future interest rates. The current rates for subsidized student loans are 3.4% and unsubsidized loans are locked in at 6.8%, with many private loans coming in at rates even higher than this. Right now the 3.4% interest rate loans are set to double as of July 1, though there are bills on the table to prevent this rise from occuring

Then there is other end of the spectrum - Senator Elizabeth Warren is actually campaigning to get the rates on student loans lowered.

As you can see from the above image, she wants students to be able to get loans for the "same rate as the banks". I personally find this a bit ridiculous, as the 0.75% rate is the overnight lending rate to the banks. These loans are not being held for 4+ years and it would be impossible to even break even at these rates. Trust me, I am no fan of the banks but I just don't see this strategy being feasible or sustainable. Whoever is loaning you money needs to either profit (private), or be able to break even (government or non-profit).

I'm not 100% sure about all these rate changes, because I'm not sure how much subsidized loans actually come back to the taxpayers but I do agree that student loans should be able to pay a competitive rate. You can get a mortgage around 3% in the current environment and car loans and other loans can also give much better rates when compared to the current student loan market, especially on the private side of things.

I know there is a lack of collateral behind student loans when comparing it to mortgage or a car loan, but there is also the fact that student loans are very rarely discharged in bankruptcy - they are with you for life! A better campaign would be to try and keep the subsidized loans at a rate of 3.4% in the current environment, and focus on getting the rest of the student loan rates below 5%. I think this would be a fairly reasonable solution and would help out a lot of students. Of course, we all know what happens when reasonable and Congress are brought up in the same sentence. We end up with two extreme stances and have to hope they somehow to end up on that reasonable solution.

I still personally believe the biggest thing that needs to be done about student loans is education as I had said in a previous post. General education on personal finance, taxes, and credit in general would be great too! This topic in general is of great interest to me, because the interest rate on my student loans is what really makes me want to get rid of them. The fact that I'm losing so much extra money each month on top of the money I borrowed is what really is driving me to pay them off as soon as possible.

What is your opinion on the current state of the student loan interest rates? Do you think lowering them is the correct solution? 

Further reading on this topic: 
LA Times - Elizabeth Warren Proposal
NY Times - Preventing Student Loan Rate Increase

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Posted in Debt, Student Loans

Student Loan Education

I personally believe the biggest thing that needs to be done about student loans is education about what exact these student loans mean for your life after college. I personally had no idea the extent the amount of debt I was piling up while at school or how exactly it would affect me after graduation. I definitely didn't have much knowledge on personal finance, investing, or anything of the sort - and I'm still a novice at this.

My parents did teach me the importance of saving money, not wasting money, looking for deals, and never abusing credit. For this I thank them; I have never built up a credit card debt and always pay the full amount each month.

But when it came to student loans, this was brand new to all of us. My parents had never went to college, and my high school guidance counselor never even hinted there was another option. I had great grades and student loans were just part of the process of going to college in my mind.

Most 17-18 year old seniors in high school have no idea the concept of a huge sum of money. The extent of their personal finance probably comes from car payments, car insurance, gas money, and money to hang out with friends. They most likely do not have a mortgage and hopefully don't have a huge credit card debt to their name. The concept and size of $25,000+ student loan debt is foreign to them.

A few things that I think can prevent situations like my own, or even worse case scenarios is full education on student loans:

•  Guidance Counselors in High School and parents should be able to tell students that college isn't the end all solution. It IS possible to learn a trade, get job experience, and still be just as successful within certain professions.
• Community college is a great option, especially if you are unsure of what you want to do. A majority of people switch majors, so you can save here by making the change at a lower cost.
• Many state schools have great reputations and can be a lot cheaper per year compared to private schools
• Before accepting any loan students should be given a screen showing how much they are taking out for that year and then the following calculations would also be mandatory for the lender to show before the borrower accepts: 

1. We'll go with an example of $5,000 a year. First of all, the student should be shown how much this $5,000 debt will actually be if it is unsubsidized loan. If that loan is taken out freshman year, it will be closer to $6,500-$7,500 by the time the student graduates. The borrower should be made aware of this amount!
2. The borrower should be given an estimation of their 4 year cost of going to school based on this first loan. So if they are taking out $5,000 for the first year, it should show them that they will most likely end up with $25,000-$30,000 total in debt after graduation. I believe that seeing the total amount gives a much better perspective than the individual amounts being taken out each year
3. The borrower should then be given an estimation of how much their minimum monthly payments would be based on that calculated total debt. I think it should also show them an estimate of how much is going to principal each payment, and how much would be going to interest.
4. The last thing would be that they are able to select various degrees and the area of the country they are in and be given salary estimates. Based on these salary estimates, the net income for each month should be shown and then the student loan payments should be subtracted from that total. The borrower would then be able to see how much money they would have leftover each month after those minimum payments. 

I believe that if this transparency was shown before every student took out a loan, you would see a lot of people rethinking their choices. That $50,000 graduating salary doesn't look as good when you have to give half your take home pay to paying that loan off! Just being able to see the huge amount and the effect it will have on you in front of your face would be a huge deal.

Do you think that education and transparency about student loans would help reduce the amount of debt that students are graduating with?

Photo Credits for this post: Pixabay

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Posted in Debt, Student Loans