Will Your Student Loan Payment Be Worth It?
Oh college… what great times! Back when your only job was to
drink shamelessly 5 nights a week make it to Quidditch practice on time fill your head with knowledge and meet new and interesting people so that you could leave and be a productive member of society. It was a time that led you to believe that “Yes, I can diagnose any mental illness because I’m halfway through my freshman psychology seminar”, “Yes, I can fix the global economy because my economics textbook had this totally great part about the invisible hand”, that “Yes, Ultimate Frisbee is a real sport.” But the part they don’t tell you, the part that really bites you in the ass later in life is this: it all comes at a price. And that price, dear reader, is going to be your student loan payment.
Today’s topic is… (cue the Jaws theme…)
Now if you’re reading this, then you’re one of two people. If you’re the person that did not have to use debt to finance your education, you lucky sunuvabetch, then kindly leave. Just go. My envy of your financial bliss burns hotter than a ghost pepper working its way out of your digestive tract. #casperthenotsofriendlyghostpepper
For everyone else, I’m assuming that your student loan payment will be waiting for you at the end of your 4 blissful years. The 1.2 trillion dollar party that is second only to mortgage debt. It’s a rockin’ good time. #jk #itactuallysucks
Now, as a finance major and someone who generally tries to be as efficient as possible, I’m going to start todays discussion of college debt with the following statement. Fasten your seat belts boo boos, because I know there are other financial Wizards and Wiccans out there that will disagree:
NOT ALL DEBT IS BAD.
I know, I know, how could you say something like this PUBLICLY?! Paul, don’t you remember the big banks and the financial crises?! What about the Bailout that was paid for with tax payer money? What about Corporate America and the one percent, they’re just trying to squeeze EVERY LAST DOLLAR OUT OF THE WORKING POOR UNTIL THERE IS A GLOBAL REVOLT OF PAUPERS AND THE ENSUING ANARCHY AND RAGE OF THE MASSES BURNS WITH THE FIReY PASSION OF 1,000 SUNS!
…chill the fuck out for a second.
There are 3 parts to my argument that are important. First, what kind of debt you take on is super important. Secondly, the amount you take on is going to affect your lifestyle. And third, and I cannot stress this enough, is your plan for capitalizing on your degree. You need to have some idea of how you’re going to make your student loan payment every month, and still have enough left over to
go out every weekend live. Shocker, yet I’ve never heard a single college student say “This is how I’m going to assure that I get a good return on my educational investment.” So buckle up, buttercups. Here we go.
What kind of debt?
When you entered your senior year of high school, I’m sure you were stoked about Friday night football games, parties when your friends parents are out-of-town,
what happens after prom, and all the fun teenage shenanigans that come with the territory. However, somewhere off in an evil lair, financiers were plotting to take a hefty chunk of your paycheck once you got through your four years of college. Yep, your student loan payment goes towards their limos, suits, and their second third fourth wives. That being said, there is not “one size fits all” when it comes to financing your college education with debt, and that’s good news for you. Here’s what you can use, in order of best to worst:
Family – For the sweet love of whatever you hold dear, please please PLEASE hit up your family for some funds before anything else! I know most people don’t come from a background where mom and dad can simply finance your education, but every little bit that you borrow from them means that you’re not borrowing from either the government or bank. And while it’s great to build up your credit (more on that in a later post), right now your number one priority should be to pay as little interest as possible. Family members are almost guaranteed to give you a better deal than the government or the bank, so start sending thank you letters, make the trip to visit grandma, and see if they can help you. You’ll be glad in four years that you did.
Interest Free Student Loans – These are the next best thing to family loans, as they’re still interest free, but require a little bit more work on your part to get. For example, I financed part of my financial need for college with a Military Officers Association of America Interest Free Student Loan (find more information here). For some more ideas on what sort of interest free options may be available, check out this article. Keep in mind, a lot of these loans are given to people with very specific backgrounds (such as my dad being a vet), but they’re definitely worth checking out; you never know what you might find!
Direct Subsidized Loans – These are the loans where you have to worry the least. You can borrow anywhere from $5,000 to $12,000 per year, and the US government will pay the interest charges while you’re going through school. All you have to do is wonder how you’re going to pass that Calc III final, not how your going to start paying off your loans while in college.
Interest Rate – 4.29%
Direct Unsubsidized Loans – These loans are the adopted, red-headed step sibling to the Direct Subsidized Loans. The key difference is these loans start accruing interest while you’re in school, which can snowball to a pretty substantial sum after four years (god forbid you take 5 or 6 years to get your degree completed). Here’s what I’ll say on these: they’re there if you need them, but don’t use them if you don’t.
Interest Rate – 4.29%
Federal Perkins Loans – While still a federal loan program, these loans are actually given through your university, not the government. But they can be a great way to bridge the gap between what money you’ve raised and how much more you need. You can take out $5,500 per year, but your must demonstrate exceptional financial need to be awarded this loan. Find out more here.
Interest Rate – 5%
Direct PLUS Loans – These are the scary ones, for a number of reasons. If you’re planning on using them for your undergraduate degree, then I hate to break it to you: YOU will not be signing for these loans. Your PARENTS will, which puts them on the hook for them as much as you. These are also the most expensive federal loans for undergraduates that exist. You can borrow as much as you need to cover your schooling, but of course, it comes at a cost…
Interest Rate – 6.84%
Private Loans – Private Loans are where your going to find a lot of scary stories. Why? Because these banks are pretty much allowed to put what they want in their loan contracts and do. You might be required to make payments while you’re in school. You might have to start paying back your loan extremely early after graduation. You might have to pay a ridiculous interest rate. These you should be avoiding at all costs. Write more scholarships, work a summer job, beat up someone for their lunch money (jokes), do whatever you need to avoid these loans.
Interest Rate – 2.99% to 11.75% (that was the highest I’ve seen, I’m sure there are some others that are higher)
Loans to Lucifer – You could, of course, just leverage your soul to finance your college degree. Depending on where you go to school, this option might seem prevalent in a few of your fellow undergrads (I’m looking at you, Harvard). Of course, at $60,000 per year, some of you might be thinking this is worth it, and you might just be right. If you plan on going into banking, law, or sales, you might not need your soul anyhow…
Interest Rate – Your soul (which you might still think is cheaper than some of the options above)
How much debt?
The second consideration in determining whether or not your student loan payment is worth it is how much college debt you’ll have in total. Now, in the financial world you hear a lot of numbers thrown around as the average amount of college debt one graduates with. You’ll hear anything from $25,000 to $35,000. I think a nice round $30,000 works out to make my point. If you have $30,000 dollars worth of loans at what we’ll say is an average of 5.00% interest, then your monthly payment over ten years is going to be $318.20. This is kind of a scary number, considering a fair number of graduates don’t leave their cozy dorm room with a job offer letter. However, this is certainly manageable if your making other logical decisions about your money once you’ve graduated. You can justify 2-3 times this number,as long as you’ve considered my final point…
Plan for capitalizing on your degree!
This point is not discussed often enough, and it really is a huge piece of the puzzle when it comes to determining whether or not taking on debt is a good idea. Simply put, if your going to make the choice to finance your degree with debt, then that’s ok, as long as you have a plan for paying it back. If you’re going to go to Harvard, Princeton, Yale, or any other school that’s ungodly expensive, then you best be damn sure that if you’re using a lot of debt that you’re not using it to study 18th Century Russian Literature. “But Paul, I thought that college was a time for exploration and self-realization, where I finally find out who I really am through various studies of arts, sciences, languages, philosophy” blah blah blah. Just shut up for a second. Of course, you should take some weird courses in college; exposure to new ideas is a huge part of university culture. This is NOT the same thing as “I majored in Philosophy because (insert stupid fucking reason here). Don’t spend a boatload of money on a degree that’s not going to pay you back. Period.
This seems obvious, but how many friends do/did you have in college that were meandering through their degree, financing it with a large amount of debt, and landed on their senior year with “I don’t know, I got this marketing gig lined up but it doesn’t pay that well” or “Well, I’m an English major and I couldn’t find a writing job so I’ll just teach”? Then you don’t have the luxury of taking that job; you need to find something that’s going to give you an actual return on investment!
This means that yes, you need to buck up, become a
somewhat responsible adult, and think about how your actions are going to affect your financial stability 2, 5, 10 years down the road. If you’ve got a passion for Mergers and Acquisitions, and have been pitching stocks since before you were shaving (face or legs, we’re not here to discriminate at TCTR) then by all means use debt to get a job that will pay you 6 figures at graduation. If your goal is to do volunteer work in Africa, to leverage that experience into non-profit leadership, then you’re more than likely not going to be in a position to make a four figure student loan payment every month.
Keep in mind there are options out there that help you increase your return/help you pay off your debt without necessarily finding a higher paying job. Teach For America is an AmeriCorps program and as such gives substantial aid in deferring and paying off student loans! The Peace Corps has loads of options depending on what your lender will allow (things like forbearance, paying interest, partial Perkins Loans forgiveness and other loan forgiveness programs).
A perfect case study in this is law school. Now, pretty much any law school seems to be prohibitively expensive. We’re talking $50,000 – $60,000 a year, on top of the opportunity cost of not earning for three years, and you’re easily looking at over a $200,000 price tag. Now, while this is scary, it’s ok if you’re going to Yale Law to leverage that degree into a BigLaw salary, starting at $160,000. It’s ok if you’re going to Yale Law to leverage that degree to get into a judicial clerkship to launch your political career. It’s ok if you’re going to Yale Law to leverage that degree to become a public servant, and you’re going to use the Public Service Loan Forgiveness Program.
It is NOT ok if you’re going to law school and amassing all that debt if you “Just got a good LSAT score and Sam Waterston made that shit look real af on Law & Order”. It’s NOT ok if your plan is “To see what I like/don’t like in law school and figure it out from there.” It’s NOT ok if “My parents always thought I’d be a good lawyer because I was really good at arguing with them and I really don’t know what else to do.”
Stop it. Just stop it. Get yourself ahead of the game, and if you’re going to spend a shitload of cash on an education, than make sure you have a plan for getting your money back.
Will Your Student Loan Payment Be Worth It? – The Wrap Up
Here’s the long and the short of it: your education is an investment. You’re attending college not just to meet twins, learn your capacity for alcohol, or have any fun whatsoever. Ha, jokes. Seriously, enjoy your time in college, but if your making an investment of tens of thousands of dollars and at least four years of your time, you need to know three things. You need to know what kind of debt you’re going to use. You need to know how much you’re going to use. And most importantly, you need to have a plan on how you’re going to make the money back.
Comment below on what kind of debt you’ve used to finance your fancy piece of paper!
Until next time, dear reader, keep trying to crack the code,