Student Loan Dilemma
Student loans are a huge problem for lots of people. And it’s no wonder, really. After all, the way the system works now, you figure out where you want to go to school, apply, get in, apply for a student loan, are granted one, and then you proceed to rack up the debt until you’re finished school, at which point your student loan becomes repayable.
No one ever stops to think about how much of a payment they can afford, based on the income they can expect from their after-school careers.
Parents don’t stop to think. Students don’t stop to think. School counselors don’t stop to think. Universities don’t stop to think. The financial media doesn’t stop to think.
The result: students are graduating from universities and colleges with debt that’s as heavy as Mama Cass.
The student loan system isn’t doing very much to help either. Students regularly choose the “variable interest rate” option on their student loans because it is cheaper, and then start paying back their loans. What they don’t understand is that when interest rates inch up, but their payment amounts remain the same, more of their payment is going to pay the interest, and less to pay the principal they owe. I worked with one woman who, after paying her student loan for two years, had paid off a whopping 17 cents.
Most students don’t look at their loan statements. When I showed Chantelle her statement with the 17 cents paid off, she just about fell over. Well, why would they? Look at their statements, I mean. Lots of their parents hide their financial statements, throwing them in draws or boxes or trash bins and pretending they don’t exist.
What’s the answer?
We need to talk to our kids about the responsibility they assume when they take out a student loan. We need to help them see how much debt they can handle without strapping themselves so tight they squeak.
There are tools available. Go to canlearn.ca for great calculators and advice on managing student loans. My favorite is their Loan Repayment Calculator. Using it, you can figure out just how much debt you can afford to take on to work your debt repayment into your cash flow once you graduate.
Remember, as a rule of thumb, you shouldn’t spend more than 15 percent of your net income on debt repayment (not including housing and transportation).
This will take some thinking about. It’s not an easy-peasy exercise. You have to research what you think your income will be at graduation. So maybe an undergrad degree in Ancient Egyptian Art won’t really pay off. You should do some pretty detailed research about how to get as much free money as you can. And you have to make some decisions about your school/work balance while you’re getting an education so that you don’t end up with Mama Cass sitting on your shoulders at graduation. The effort will be worth it. I promise.
December 11th, 2007 at 10:27 pm
If you are able to attend school while living at home, and work full-time during the summers and part-time during the school year, you might be able to avoid student loans completely, especially if you put off gigantic purchase (like vacations) until after you have graduated and started working full time.
There are tons of other ways to save money as well (taking public transit, taking lunches to school, borrowing or buying used textbooks, etc)
I had scholarships for most of my first year of university, but paid for the next four years myself with no significant financial or personal hardship.
December 12th, 2007 at 7:39 pm
I am soooo glad you posted this. So often I hear from people that it’s impossible to get through school without debt. When I hear from smart people like you, I am heartened. Congrats on being smart!
December 15th, 2007 at 5:23 am
Well, I paid for all of my undergrad through frugality, part-time jobs, and parental help with tuition: I didn’t need to live with my parents, thank heavens. But most advanced degrees — law school, med school, grad school and MBAs — are programs you relocate to attend and enter in your mid to late 20s, so the stay with Mom and Dad solution doesn’t apply.
Still, most of my graduate work was fully funded; I had good fellowships. But I still wound up trying to finish my thesis while working full time, which just doesn’t work. Eventually, I gave up and took out loans, which let me complete my doctorate. They wound up being distressingly large, and I’m still throwing vast amounts at them in order to make them die — living with a roomie and living like a graduate student. But they were also worth it: I have a great job.
So student loans aren’t the epitome of evil: they’re disheartening, but they’re also functional, rather like a mortgage.
Oh, and the Ancient Egyptian Art might be more functional than you think, in an academic context
December 15th, 2007 at 10:05 am
I’m curious jrochest. How old are you? And what percentage of your income is going to pay your debt?
December 28th, 2007 at 10:33 am
I’m very glad to read this post! I must admit that I’m always shocked when I hear people complain about how difficult it is to go to university now-a-days because of the loans they are “forced” to take out. I’m very happy to say that I graduated from both my undergraduate and graduate studies with no debt, and was able to purchase my first car (and maintain the payments) at 23 and my first home at 26 (I’m 28 now).
It wasn’t easy–but I don’t regret a single decision I’ve made. I chose to attend a university that was close to where parents lived so that I’d only have commuting costs. I worked 20 hour/week during the school year for both my undergrad and my graduate studies, and full-time during the summers of my undergrad years. They weren’t glamorous jobs, but they helped to pay the bills.
January 4th, 2008 at 5:21 pm
Sorry about the delay in replying, Gail: I’ve been at my folks for the holidays, without online access.
I’m somewhere between 40 and death :), earn 75,000 a year as a professor and pay about 34% of my take-home towards my loans (I live with a roomie, take the bus, brown-bag it and live somewhere I can’t possibly shop, etc.)
I know this repayment schedule is insane — my payments as scheduled by the bank are supposed to be 6% of my take-home pay. But they’re enormous and I want them gone! One is gone, the second is shrinking: I’ll have it dead by May 09 if I keep this up.
As enormous as they are, I’m still glad I took them out: I’m a much better professor than I was a secretary.
January 10th, 2008 at 9:38 am
Jrochest is right on. The amount of debt for those who do advanced degrees is overwhelming. Professional schools cost anywhere from 12k to 25k a year and OSAP only will give you a small fraction of that.
I am currently feeling the pain from this, trying to pay off many student loans at one time. I currently have about 58k in student debt and that is after paying off a good chunk when living at home for a year.
Its definately good advice to think about what kind of payments you can afford to make based on your future employment before taking on such significant debt.
June 14th, 2008 at 7:51 pm
I had no choice but to go away to college for my degree. I chose an in state universy. Tuition was cheap($2100 when I started, $3300 when I finished 5 years later). What was really expensive was living. At that I never took as much loan money as was offered. I had one grant that covered most of my tuition. All but one of my student loans was a federally subsidized loan (US Government paid all interest while I was in school and for 6 months after). When I graduated from college I owned my car (which is now nearly 8 years old and still runs great), $16,000 in a subsidized stafford loan and one $6000 PLUS Loan. I paid the PLUS loan off during the deferment of my federal loan. I then consolidated my stafford loans to a loan with 3.125% interest rate. In the mean time I have been saving for a house. I always worked full time when I was off from school in the summer and never spent a dime of it until school was in. During the year I worked 8 hours a week (this included lunch 2 day of the week) on top of the 32 hours of class I was carrying. My days started at 7am and easily went until 12am (if not later at the end of the term). Until very recently my savings account was earning interest at a higher rate than I was paying on my student loan.
Student loans are not inherently evil but they can be if not used responsibly. I turned away money every year. I would actually sit down and figure out how much everything would cost me for the year. Car insurance, parking passes, books, supplies, utilities, tuition, rent and food. I subtract my savings from that number and borrow the difference. Money was always tight but I never felt like I couldn’t have fun in school. Student loans should only cover your “needs” never your “wants”.