Although the student loan system underwent changes, graduates are still struggling to pay off debt.
Rachel Donahoe said she doesn’t know how she is going to pay off her estimated $40,000 in college loans.
Donahoe graduated from Temple last spring after double majoring in English and history. The 22-year-old is currently working, but she has been unable to find a career with her degree, despite multiple interviews with potential employers.
“I’m not quite sure how I’m going to do it at this moment. I was looking up, yesterday, options for deferment or … possibly [paying] a lower amount on the student loans now, and pay more later, but that’ll add even more interest,” Donahoe said.
Donahoe took out two types of federal loans: Stafford and Perkins loans. During her last two years, she also took out a Sallie Mae loan. All but one of the loans were subsidized, meaning the government doesn’t charge interest until the borrower is out of college and starts paying the money back.
Mark Kantrowitz, publisher of FinAid.org, said in an e-mail that students don’t always pay attention to the loans they’re taking out and conclude that they’ll figure out how to pay them off after graduation.
“The time to consider how you’ll repay a loan is before you sign the promissory note, not after,” Kantrowitz said.
OLD & NEW SYSTEMS
According to the New York Times, students and families took out more than $95 billion in loans, both federally guaranteed and private, in the 2008-09 academic year.
On March 30, the Student Aid and Fiscal Responsibility Act, a rider on the Health Care and Education Reconciliation Act of 2010, was signed into law by President Barack Obama, bringing a number of changes to the student loan system.
As per the new law, and effective since July, all federal education loans are made through the direct loan program, which cuts the middle man – private banks and lenders – out of the equation for federal education loans.
Information, such as income and household income, is considered when determining how much a student needs to afford college.
Although private banks still offer education loans, they sometimes require a co-signer and are neither restricted to government-set interest rates nor government guaranteed.
Kantrowitz said federal education loans should always be the first choice.
“Students should always borrow federal first, as federal student loans are cheaper, more available and have better repayment terms than private student loans. The interest rates on federal education loans are also fixed rates,” Kantrowitz said.
Perkins loans, which are granted on a need-basis, Stafford loans and Parent PLUS loans are all forms of federal education loans.
The income-based repayment plan is designed to make the monthly payments for federal education loans based off the borrower’s discretionary income, not the amount owed.
Under the new provisions, but only effective to those who take out loans on or after July 1, 2014, monthly payments will be based off 10 percent of discretionary income and allow borrower’s to be forgiven of their loans after 20 years of responsible repayment, rather than the current 25-year plan.
THE FINE PRINT
“Students often treat loan limits as targets, borrowing to the limit. But every dollar you spend with student loan money will cost you about $2 by the time you’ve paid off the loan,” Kantrowitz said.
“You should never borrow more for your entire education than your [expected] starting salary after you graduate,” Kantrowitz said. “If you’re borrowing more than $10,000 for each year in school, you’re probably over borrowing.”
Donahoe said she did not realize exactly how much she would have to pay after graduation.
“I knew that I would have to pay interest on the loans and pay them over a period of so many years,” Donahoe said. “As far as what they actually came down to, in an exact amount every month, or what it would eventually add up to, I didn’t have an exact idea. I just knew that I had to pay it back with interest.”
“At most, a quarter of students understand how the monthly payments are calculated,” Kantrowitz said. “Many are surprised to find that the total interest paid over the life of the loan can exceed the amount borrowed, so one typically repays about twice what one borrowed, especially if one chooses a longer repayment term.”
Nomi Leasure, a sophomore broadcasting, telecommunications and mass media major, who was prompted to take an online information session and quiz in order to get her loan, said she disregarded the bulk of the information.
“You have to read all this stuff about your loans and then take a little quiz at the end,” Leasure said. “[It] explains everything, but it takes like an hour so most people just skip ahead to the questions. They’re pretty common knowledge, so you just answer it – bulls— it – it’s really easy just to get it done.”
PROFIT BY LENDING
“Twenty-five thousand dollars in unsubsidized Stafford loans will have monthly payments of $288 with a 10-year term, totaling $34,524. That’s about $9,500 in total interest paid,” Kantrowitz said. “If they switch to a 20-year repayment term, it will cut the monthly payment by a third, to $191, but the total interest will more than double to $20,800.”
Donahoe, who has approximately one month left until her loan repayments begin, said the government means business.
“When they say six months, they mean the exact day,” she said. “The exact day from when I did the ceremony at Temple.”
Donahoe said she would advise students to look into all of their options for financing school.
“I’d definitely tell people to keep in mind the finances when going to college,” Donahoe said. “You do have to pay it back eventually, and eventually means six months, so you have to pay it back pretty fast.”
Jennifer Porteus, a freshman anthropology major, said she and her parents took out a Parent PLUS loan and, although she’s not sure of the exact amount, she knows it has a fixed interest rate.
“I’m already stressing about it,” Porteus said. “I’m going to have to figure it out. I have to take out a separate loan every year.”
With a Parent PLUS loan, the responsibility to repay the loan falls on the parent, not the student.
When it comes to repaying loans, Kantrowitz said students should start by focusing on the loans with the highest interest rates.
“Target the loans with the highest interest rates (usually credit card debt and private student loans) for extra payments first in order to save the most money,” Kantrowitz said.
Donahoe said she hopes her education is worth the money.
“I’m hoping it will be worth it,” she said. “Right now it doesn’t feel that way.”
Angelo Fichera can be reached at firstname.lastname@example.org.