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Student loans are often presented to us as the “gold standard” path to success.
If you’ve been following my blog for a while, you know I deeply regret borrowing hundreds of thousands of dollars to go to school.
My student loan debt turned in to much more of a nightmare than a blessing, and I think there are many other people that feel that way!
That’s why I’m so excited to welcome Chrissy Knepshield from A Plan to Prosper, to talk about the pitfalls of taking out a student loan.
More and more students are using private or federal student loans to pay for their higher education.
With over ⅔ of US college students borrowing money each year, the student loan deficit has surpassed 1.6 trillion dollars.
The average graduate has $30,000 in student loan debt by the time they earn their degree.
Although student loans may not be the primary focus of the college planning process, applying for a student loan is a discussion worth having as part of your college career.
By doing your part and understanding how federal and private student loans work, you will save yourself time, money, and some frustration in the long term.
Today, I want to discuss some of the pitfalls of taking out a student loan.
My family knows all too well the ramifications of taking out student loans.
If you are considering applying for a student loan, or have recently applied for a student loan, consider the following tips to help set you up for success once you have your degree and go out into the job market.
Not All Student Loans Are Created Equal
Federal Student Loans
There are 4 types of federal student loans and they each have different requirements and restrictions as described below.
Direct Subsidized Loans- are types of loans that are available to eligible undergraduate students who have a demonstrated financial need.
Since the loans are based on need, you are limited in how much you can borrow in the form of a subsidized loan each year (either $3,500, $4,500, or $5,500, depending on which year of college you borrow the money).
Additionally, there is a $23,000 lifetime cap on these types of loans, which may not be enough to cover the education at your school of choice.
Because you are limited to what you can borrow, and the costs of education continue to rise, you may find yourself pushed into other types of loans or seeking alternative funding.
Direct Unsubsidized Loans- are types of loans that are available to eligible undergraduate and graduate students which are not based on a financial need.
While you still enjoy some of the benefits of subsidized loans, such as low interest rates and the potential for flexible repayment options, unsubsidized loans begin accruing interest as soon as they are disbursed.
This means that while you are still in college, your interest is accruing, and often capitalized, resulting in a higher repayment amount than what you initially borrowed.
If you utilize these types of loans for four or more years of higher education, you could be adding potentially thousands of additional dollars to your loan repayment amounts by the time you graduate.
Direct PLUS Loans- are types of loans that are available to eligible graduate students as well as parents of dependent undergraduate students which are supplemental loans meant to pay for expenses not covered by other financial aid.
For example, a student who has maxed out their subsidized loans and cannot qualify for a different type of loan may turn to Mom and Dad for help.
Parents who take out these types of loans can quickly find themselves under a pile of debt, especially if they are taking out a PLUS loan for multiple children attending college.
Of the three loan types above, the PLUS loans carry the highest interest rate – often 2 to 2.5% higher than subsidized or unsubsidized loans.
Direct Consolidation Loans- combine all eligible federal loans into one single loan for a more convenient payment to a single service provider.
You may have limited service provider options for consolidation of federal student loans, and you’ll need to be careful of those that are affiliates of the loan providers themselves.
Oftentimes these affiliated consolidation providers do not offer lower rates than the loan providers, and their terms may not be as flexible as you like.
Recently, several alternative consolidation providers have sprung up that offer more flexible payment schedules and lower interest rates, although you may have to carry the loan for a longer period of time.
Private Student Loans
There are a number of options out there for private student loans, and many are worth pursuing.
Be sure to speak with a bank representative who deals with issuing private student loans.
They should be willing and able to answer all of your questions regarding the loan application process and loan repayment schedule.
These types of loans are funded through a local bank, credit union, or an online provider. Interest rates and terms apply according to each bank.
Most lenders offer a grace period of up to 6 months from your graduation date to begin repayment (just like with the federal loans).
Related: How to Pay Off Debt Fast
Federal Student Loans Can Be Inflexible
Fixed Rate Loans
One of the things you need to consider before applying for a student loan is that the terms of the loan, loan amount, loan payment, and loan interest rates are determined for you and do not change.
If you get a loan with a higher interest rate, then that will make your payment amount more and also your accruing interest amount higher.
My husband has been paying a 6.75% average interest rate on his federal student loan, which equates to a $6/day interest amount, for the past 10 years.
Even if he makes the minimum monthly payment, he has to pay an additional $180 in interest alone each month.
That is insane. It will take him 30 years just to pay off his federal student loan at that rate.
Refinance Challenges
When you have a federal student loan it can be difficult for you to transfer to a private lender.
Depending on how many years you have had the student loan, it may make more sense to keep paying to the federal loan lender.
Do your research and find out what banks offer federal loan refinancing.
My husband was not successful finding a private bank to refinance his federal student loan.
For those who can successfully refinance a federal student loan, remember that the terms will likely be longer and the payment a little higher depending on the interest and loan amount.
Terms and Payments
For federal student loans, most of the terms and payment amounts are predetermined.
Because the interest rates are fixed, the monthly payment does not change; however, you do have an accruing interest that is added to the loan amount.
Federal student loans can take anywhere from 10 to 30 years to pay back, depending on whether or not you consolidated any previous loans.
My husband originally had a 10 year loan repayment plan that he could not afford.
Because he let his federal student loans go into default (failure to make payments), his wages were garnished after not paying on his loans for several years.
Once he consolidated all of his 13 individual student loans, he now had a much higher monthly payment as well as a longer term to pay it off.
We basically had to start all over paying off this debt because he did not have a plan to pay it off as soon as he got the billing statement.
Related: How to Stay Motivated Paying Off Large Debt
Student Loan Debt Can Exceed Career Salary
Having a student loan does not guarantee that you will even earn a degree and get a high paying job.
Millions of students enter into college, but not everyone finishes and earns the degree that they set out to earn.
On average, about 60% of students who enter college, actually finish with a degree.
Even if they earn a degree, the salary may not be what you had expected.
When my husband and I went to college, I earned a degree in 2 years and paid off my student loan in one year.
On the other hand, he went through college shy of four years then dropped out.
He had maxed out his borrowing financial aid and did not have enough cash to finish and earn his degree.
Today, we live off of my husband’s income, but he is not in the field of study he went to college for.
Related: How to Cut Your Family Expenses
Student Loan Debt Can Steal From Your Future
There are other options to pay for a college degree.
Grants, scholarships, and even working through college are all options to be debt free after graduation.
Student loans may be an easy way to pay for college up front, but a better way to go through college can be by getting on a budget and spending only what you can afford.
Consider a community college or technical college to earn prerequisite credits at a lower cost and always consider in state college for lower college tuition.
You may also consider if the amount of debt you incur is worth it in the long run.
Not only must you invest the time and money up front to earn your degree, but you must also invest time and money (by working some sort of job) to pay off that debt later.
When making these sorts of decisions, think about what you want your “later” to look like.
My family has been paying on my husband’s student loan debt for over 10 years now.
It has become a thorn in our side because we continue to pay for a degree that never came to be.
College is a huge and important investment in your future.
Please do your diligence by researching the cost and commitment of college attendance and weigh out the pros and cons.
Final Thoughts on Student Loans
I have nothing against higher education.
I simply believe that if we educate ourselves before we make big decisions and ask questions, then we are better off in the long run.
Millions of young adults are graduating with tens of thousands of dollars in debt and no job lined up to start to pay off their debt.
This does not have to be the only option for anyone who wants to earn a college degree.
That being said, I hope that you will recognize and be aware of these pitfalls of taking out a student loan and be one of the few who graduates college debt free.
College can be a wise choice and so can going to college and paying for it with cash, grants, and scholarships.
About the Author
Chrissy is the founder and creator of the personal finance blog a plan to prosper. She is a stay at home Mom of 3 and household CEO. Chrissy desires to share with other stay at home Moms all about mindful spending, intentional saving, and practical debt reduction. As her family journeys toward debt freedom, her goal is to inspire others along the way. Chrissy enjoys creating savory dishes & listening to podcasts.
hi! I'm shannon
I’m a wife, mom of three, doctor, and blogger! In 2018, I decided to turn my mom blog, into a personal finance blog so others could follow along on our journey to pay off over HALF a MILLION dollars in student loan and practice start up debt. I hope you enjoy following along, and maybe even find some inspiration along the way.
