43 Million Americans are in student debt
Forty-three million Americans are in student debt and owe $1.6 trillion dollars collectively as of March 31, 2021.^ As tuition continues to rise, students are spending more than ever on higher education. While some students know and understand the costs, others blindly borrow without a plan. Nevertheless, a financial plan for education can help you become successful. So, where should you start?
Consider the costs
Firstly, you should consider the costs which include not only tuition, books, and living costs but also opportunity costs. An opportunity cost is the loss of a benefit that you could have enjoyed if you had made a different choice. With that said, think about where the student loan’s accrued interest may have been spent. Maybe that money could have gone towards a future car or home. Or, perhaps you could have invested that money. Also, you should consider any missed experiences the burden of student debt will cost you.
A few ways to minimize your costs are by applying for scholarships and grants, by working part-time jobs to borrow less, by living with friends or family, and by paying more than the bare minimum once you begin repayment. By doing these, you will successfully cut down the amount of interest and time it takes to pay off your loan. Regardless, treat your education like an investment and decide what level of risk you are willing to take when it comes to the costs.
Education financing options
Who can you borrow from? Most students are eligible for federal loans backed by the government that are subsidized or unsubsidized. With federal loans, the school determines how much you can borrow based on the cost of attendance, your financial needs, what school year you are in, and if you are an independent or dependent student. The Federal Student Aid (FSA) also sets annual limits, such as first-year dependent students may borrow up to $5,500 and no more than $3,500 of this amount can be subsidized where the government pays a portion of the interest accrued.
Furthermore, you will need to apply for private loans from either a bank, credit union, or an online lender if you have exhausted all of your federal loan options. While it is great that you are able to get more money for your education, this money typically comes at a much higher interest rate. In short, you need to shop around.
Once you graduate, one of the perks of federal loans is that you have a 6-month grace period before you must start repaying them and you can generally pause the payments if you reenter school or if you are experiencing financial hardships. Additionally, President Biden is currently working on improving the Public Service Loan Forgiveness (PSLF) program which allows qualified government and not-for-profit organization workers to get federal loan cancellation.
Moreover, the FSA’s loan simulator tool is a great resource if you would like to come up with a repayment strategy, check out repayment options if you are struggling to make payments, or if you want to find out what will happen if you borrow more. For instance, what would your payments look like if you began repayment of a $26,946 federal loan balance at 3.9% in July 2020 with a $27,923* income at a 5% average income growth** for a 4-year public school? The FSA’s loan simulator estimates the fastest payoff would be $272 per month until June 2031 with a total of $32,585 paid.
All in all, we urge you to try to get ahead of future debt and make a financial plan for your education. Contact a banker today to learn more about our personal checking and savings options that may help you achieve your financial goals quicker.
^According to Nerdwallet
*Louisiana 2019 median income according to United States Census Bureau
**According to a U.S. Department of Education and U.S. Department of Treasury analysis of a representative sample of actual student loan borrower incomes, the borrower incomes increase, on average, at a rate of 5% per year.