The student loan trap and how to avoid it
For the first time in history, student loans have outpaced consumer spending, reaching $1.6 trillion in 2019 and projected to hit $2 trillion by 2021. As millions of students go to college every year, they also sign up for years of hefty debt repayment without fully understanding the consequences. Now let me get this out of the way-I don’t think debt is necessarily a bad thing. I do however think it becomes a problem when an 18-year-old signs off on a six-figure loan + interest without recognizing the magnitude of that commitment.
Before borrowing, consider some of these factors below to help you take on only what you can afford and avoid the student loan trap.
only borrow a lot if you plan to make a lot
The US Department of Education recommends “students not take on a student loan payment that exceeds 10% of their total monthly income”. Therefore, if upon graduation your prospective career has you making $40k a year ($3300/month) for the next 2-3 years, your monthly student loan payment should not exceed approximately $330. Most federal student loans are for 10 years and tend to have interest rates in the range of 5-7% ( for simplicity we will assume the average 6%). Assuming you make the minimum monthly payments over the next 120 months, you should not borrow more than $30k.
Focus on the principal
Keeping with the example above, that $30k loan will actually net out to be almost $40k over ten years as each monthly payment is a combination of the principal balance plus the interest. Should you come into extra money, I recommend you add that extra money to the PRINCIPAL ONLY NOT THE TOTAL PAYMENT. Since you’re paying above and beyond the minimum payment required, the lender can apply this to the principal (barring you don’t owe outstanding interest). For example, let’s say that you are able to pay an additional $50 a month on top of your minimum. If you do this over the lifetime of the loan, you could actually pay off your balance in 8 years vs. 10 and you will have saved $1800.
Consider Loan Forgiveness Programs
Both federal and state governments have set up a number of programs to help with student loan forgiveness. However, these programs do come with conditions related to the number of years left on the loan, the amount borrowed, career field, etc. Some of the more popular loan forgiveness programs include:
- Public Service Loan Forgiveness (PSLF): Set yourself up on an income-driven repayment plan and secure a job working for the government or a non-profit. If you make at least 120 payments while working for the government/non-profit, the remainder of your student loans will be forgiven. Click here for a comprehensive guide.
- Teacher Loan Forgiveness: Under the TLF program, if you teach for five consecutive academic years in a low-income school, you may qualify for up to $17,500 in loan forgiveness. Click here for a complete list of qualifications and clauses
Click here for a list of programs.
Please note that regardless of any student loan forgiveness, you are still required to pay the taxes on your loans so consult a tax attorney or CPA before enrolling in any program.
Apply For Scholarships And Grants First
I can’t stress this enough but apply to every scholarship and grant for which you are eligible. Scholarships are a great way to undo the burden of debt but bear in mind most come with parameters (particular fields of study or a minimum GPA).