Monday, July 16, 2012

5 things I've learned about student loans

I'm not going to talk about prohibitive college expenses, interest rates, or loan marketing.  Nope, I'm just going to talk about my own experience with student loans, and what I wish I'd done differently.

Some background: I attended a ridiculously inexpensive university, and managed to escape with only a small (under five figures) amount of loan debt.  I know that many, if not most students, have a much more difficult time and wind up with truly unmanageable mountains of debt.  My rambling in no way is meant to belittle that abysmal situation or to put my burden on the same scale as those who've had to work much harder to scrape by.  

Some of these might seem obvious, but they are all lessons that I had to learn the hard way.  

1) If you can possibly get by without loans and not actually starve, do it.  

For the first few years of my undergraduate career, I got by on scholarships, my part-time job in a laboratory and some support from my parents.  In my fourth year or so, I scored a much better paying student internship.  However, after five years (yeah, I know, it's only supposed to take four), my scholarships dried up.  Suddenly the school actually wanted me to pay them to go to school!  Can you imagine.  

I hadn't had the foresight to save up tuition money over the prior years, despite the surplus from my scholarships (yep, they literally cut me a check each semester, which I promptly spent on... I have no idea what).  The school wanted what seemed to be a large lump sum of money that I didn't have, so I figured I'd need a loan.  

Now I wonder about that.  Maybe I could have borrowed from my parents or a friend, and then paid it off over the course of that same year.  Maybe there were deferment options.  Maybe I could have scraped the cash together somehow.  Who knows?

What I do know is that I'd be so much more happy now without that particular, maybe unnecessary debt.  If I had to live a bit leaner in the meantime, so what?  Students are famous for being poor, and yet I suspect I maintained a higher standard of living than was strictly speaking necessary.  I wish I hadn't sacrificed my future self's (that would be now-me, writing this article) income and sanity for my standard of living then.  

2) If you have to go into debt, loans >> credit cards. 

During those same late-undergraduate years, I racked up an embarrassing amount of credit card debt.  I splurged on parties, I bought so many presents for friends, I went to Europe.  Maybe those loans were needed after all, and though I'm potentially contradicting the advice above, maybe I should have taken out more money than I did.  Interest rates are lower on loans than on credit cards in general, and I probably would be paying back a slightly lower total balance now.  

Avoid credit cards like the plague, especially when you feel like you don't have much money.  If you can't afford something, you certainly can't afford to pay even more by financing it.  Don't do it.  

3) Figure out what you actually need. 

When filling out loan paperwork at the financial aid office, I simply guessed at a number and wrote it down.  Okay, so tuition and books are reasonably predictable expenses, but I had no idea at what rate I was otherwise hemorrhaging money.  That information might have been useful.  Maybe I could have taken out a bit less, and accrued less interest.  Or maybe I should have taken more, and thus avoided high-interest credit card debt.  Or maybe I should have done the damn calculations just as a reality shock to myself, to get me to pay better attention to my finances.

4) Shop around.  Know interest rates. 

Ah, yes.  Being in a research field, one might think that I would have found all the reference materials available about loans and educated myself ravenously.  I would have found out who the different lenders were, what their practices looked like, their interest rates, their policies.  

I did none of that.  

When it came to selecting a lender, I quite literally checked a box at random. 

When my husband and I were comparing finances, I learned that the interest rate on his student loan was something like four whole percentage points lower than mine.  That's a huge difference when it comes to the evils of compounding interest. My interest rate looks more like it belongs on a credit card, not a student loan.  

Research.  Educate yourself.  This stuff is important.

5) Think about the options.

At one point in the consultation, the loan officer asked me if I'd like to pay off the accrued interest while still in school.  

Hell no!  Are you crazy?  I don't want to have to pay you now --- I'll be living on that money!  I'll deal with it after I graduate, thanks. 


Fast forward: after two years of paying down the loan, I have the balance almost down to the original borrowed amount.  That's as though these two years of money have only gone to the interest I avoided paying at the beginning.  The amounts would have been relatively tiny, and paying then would have kept the compounding in check, resulting in a much lower total payback amount.  And then I would be where I am now (owing approximately the amount I borrowed) two years ago when I graduated.  And I would be that much closer to debt freedom.  

Know the options.  Actually think about them, and examine your knee-jerk responses.  Second-guess yourself.  Your future self will thank you.  

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