Sunday, March 10, 2013

Lesson 3: Student Loans

Financial Planning for the Recent Graduate




I remember sitting alone in my dorm room late one night, during the last semester of my senior year when I decided to grow up and face the reality of how much I borrowed to finance my education.  I remember the sinking feeling in my gut when I saw my computer screen show me all of my student loans together for the first time, and when I realized how deep in debt I was.  This is a tough lesson to learn.  It's time to face reality and talk about your student loans.  The average college graduate today has more than $27,000 in student loan debt. In December 2012, outstanding student loans amounted to $956 billion. In 2012, student loans officially surpassed credit card debt in the United States.  This is an increasingly unsustainable problem that needs to be solved.  How is this happening?  Well, the cost of higher education is rising, but the ease of going to your financial aid office and getting a new loan to add to your debt is another part of the problem.  The bigger problem is, you kept going back every semester, signing your name, promising you’d pay it later, and then forgetting about it.  Now it’s time to pay back all of that debt.  The first step is to figure out where in the world it all went.  Student loans are sold to other loan providers every day, whether they are private companies, publicly traded companies, or the government.  Here’s where you need to go to track all of them down: http://www.nslds.ed.gov/nslds_SA/

Go to Financial aid review -> Accept -> Accept -> fill out all of your information, and click Submit.  If you forgot your pin, follow the instructions on this website to get your pin back. 



Once you’re logged in, you’ll probably see lots of student loans, some of which may surprise you.  They certainly didn't forget about the loan you took out way back in your freshman year, did they?  I had some of my loans sold to two different companies and was never even notified.  Next step is making online accounts for all of the different loan providers that service your loan.  Nelnet, Sallie Mae, Great Lakes, CitiBank, and on and on.  Every day, these companies are making money off of you, on your unsubsidized loans, and they have been ever since you signed that document.  6.8% for an unsubsidized loan, as a matter of fact (which is likely to be higher in the future).  If you took out a $10,000 loan, they make $680 off of you every year, almost $2 every day that you’re handing over to them, and that compounds (gets worse and worse every year if you don’t pay the interest).  It’s a snowball effect that catches and rolls over current students and recent graduates every day.

Hopefully I’ve opened your eyes a little bit.  I know I’ve made you mad.  You may have a “fair bone” in your body like I do, and you’re sitting there thinking “That’s not fair!” and want to get rid of this debt as fast as possible.  That’s what I did.  I was able to pay off my $20,000+ student loan debt in 14 months.  How’d I do it?  Don't miss this next paragraph.



Get angry at your student loans.  They’re officially your enemy.  Attack your student loans with a passion.  They’re keeping you from becoming wealthy, and you’re not going to get out of paying these loans unless you are fierce in your intentions.  Proverbs 22:7 says, “the borrower is slave to the lender”.  As long as you are in debt, you are forced to pay money out of your pocket every month until you have satisfied your loan.  When you owe someone a debt, that creditor has complete power and leverage over the money that you owe to them.  Don’t believe me?  Watch what happens if you ever miss a payment.  Those collection calls start pouring in and they push every emotional button they can push to get you to pay your debt.  

It's time to start paying your loans off.   I’m sure you have both unsubsidized loans and subsidized loans.  Unsubsidized loans run you 6.8% since the date the loan was released, and subsidized loans haven’t been accruing any interest…yet.  From the date of graduation, you have 6 months to keep your subsidized loans at bay, but after 6 months, they will begin earning interest.  My recommendation?  Start with the lowest balance unsubsidized loan first.  They are killing you with interest.  So how are we going to start paying these loans off?  We’re going to start a snowball in your favor this time.  Let me illustrate:




Remember when it snowed you were a kid and you couldn't wait to make a snowman?  How'd you do it?  You started gathering a little bit of snow and packing it down, rolling that and packing it, and rolling some more.  The more you rolled the snowball across the snow, the bigger it got, the easier it was to pick up snow, the faster it grew.  You’re required to pay a certain amount from each loan you have every month.  When you pay off your first loan, take the monthly payment you’d normally pay on that 1st  loan and add it to the payment on your next loan.  Once you pay off that next loan, take both of those loan payments and add it to the amount you are paying on your third loan.  You’re getting it!  Pretty soon, you’ll be sitting there with no payments.  What can you do with your money when you don’t have payments every month?  Whatever you want.  It’s an incredible feeling.  Here’s a Google Doc to help you with your student loan repayment, and I've included a tutorial below on how to fill it out.  



Have a question?  Want to leave a tip for how you're going to pay off your loans?  Leave a comment below or email me at finance4therecentgrad@gmail.com.





Tip 1: Host a graduation party.  Ask if your mom or dad would mind hosting, and send out some letters to your family and friends and invite them to your party.  In the letter, mention your student loan amount and that 100% of contributions will go to your loan.  Tip 1a – make good food for your guests.  Tip 1b – be true to your word and actually apply the funds to your debt.  Personally, I ended up with close to $2,000 from family and friends, which paid off one of my loans almost entirely. 

Tip 2: Get going.  You’ve waited long enough, so start paying your loans off now, even if they’re not in “repayment” yet.  At first, it may feel like you’re getting nowhere, but how do you eat an elephant?  One bite at a time.  Don’t just pay the interest, pay off some of the principal too.  Always pay more than the minimum payment so you can start to get some traction. 


Tip 3: Stop taking out more loans.  Don’t reconsolidate, don’t take out a personal loan to help you pay these off, and don’t you dare put it on a credit card.  You can’t get out of debt by getting deeper into it.  You can’t get out of this ocean of debt by swimming further down.  Start swimming up, one stroke, one payment at a time until you're debt free and back above water.

Tip 4: Be weird with your money.  Try to live on less and less every month.  Say no to going out with your friends a few more times.  Oh and when your broke friends start making fun of you for being frugal (and they will), you’re right on track.  

Images courtesy of freedigitalphotos.net by Stuart Miles, stock illustration - image ID: 10069388 and image ID: 10096038, bworradmu,stock photo - image ID: 10032599, bTina Phillips, stock photo - image ID: 10072039, brenjith krishnan, stock illustration - image ID: 10034353 and bkoratmember, stock photo - image ID: 10062848


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