Student Loan Debt

I've been learning a lot about saving money for kids lately. Savings bonds, 529 plans, vs. just opening up a savings account. Helping a kid save for the future seems like a simple idea, but of course money is rarely that simple. Lots of decisions to make, priorities to set, and tax consequences for all of it. It is a lot to think about, but I think it is time and effort well spent, trying to help the next generation get started on the important task of learning to become financially secure.

Of course, it isn't like it is just a lesson you learn as a kid and then never have to think about again either. All of us adults need to keep our eye on the prize as well, continuing to educate ourselves and set up our own financial priorities. Life has a way of getting in the way of that, making it difficult to maintain at times. But that doesn't mean we stop trying.

Anyway, I've got some awesome instrumental Christmas music playing in the background, and for some reason it is making me all philosophical. Enough with that! lol

I mentioned before that student loan debt is something I'm dealing with, and have for most of my adult life. Since I'm not the only one in the family with some student debt already accrued or looming in the near future, lets talk about that for a minute.

There are two kinds of student loans. The first are governmental, that you get after you fill out your FAFSA and are generally distributed by the school you are attending. Then there are private student loans, that are given by private companies rather than the government. Student loans are, often times, totally necessary for someone wanting to get through school, and under the right circumstances, are a necessary part of the process of getting an education. However I don't think lenders or schools often do a very good job at really explaining the consequences of student loans to young people. It isn't free money, and though everyone thinks that when they grow up they will make lots and lots of money, trust me, paying back loans is totally annoying. The more money you make, the more money you spend, and that loan payment is always preventing you from spending (or saving) money on something else.

The other thing about student loans, that they never really tell you, is that no matter what, you will pay them back. Even if you completely fall apart financially and declare bankruptcy, you still have to pay back your student loan debt. It never goes away, unless you die. Since none of us intend to die, that means you are going to pay it back. So the first piece of good advice is to take out as little as is possible. The money is tempting. I've been there, and I've taken it. But always remember it isn't free.

Loans from the government are generally at a low interest rate. I started out paying about 5.75%. Every June the rate is adjusted depending on what the economy is doing, and this year the interest rate dropped, I'm now paying between 3 and 4.5%. It is always nice when they drop, but it won't be too long and they will start going up. Private student loans are another story. They can charge you any interest rate they want. They can charge you 8%. They can charge you 15%. They can charge you 25%. So be very careful about taking them out, you really don't want to if you don't absolutely have to.

Once you start paying them off, pay them off. Sometimes you can defer payments, but unless it is a real emergency, don't! Even if they aren't demanding payments, the interest is still accruing. Even at a low interest rate, that interest can really add up. When I first started paying off my 30K I was paying about $200 a month just in interest. So if I had been making the minimum payments they were asking for, which was $356, over half of my payment was instantly eaten up just by interest alone. I don't know about you, but I thought that sucked. So for the entire year I put every extra penny I could dig up into my loan payments, doubling and tripling the payment every month. It wasn't always easy (we SO WANT to go see Tina Turner in concert, but it is just too much money for us right now), but by making those extra payments I've saved thousands of dollars in interest payments. I'm still paying about $100 a month in interest. But I'm closer to where I want to be, which is paying $0 in interest. :)

Even if you get all your loans from the same lender, they are still broken up into how much money you took every semester. When you graduate you can consolidate them into a single loan, and there are pros and cons to doing that depending on how things are set up. If you don't consolidate, when you start paying them off, identify which loan has the highest interest rate, and put all of your extra pennies into getting that one paid off first. I mean, that makes sense, right?

Debt sucks. And it can be overwhelming. But whatever you do, don't think you can just ignore it or wait until later. There are times money can be tight and you have to make tough decisions about which debt to prioritize. But as a general rule, make sure any student loan debt IS the priority.

(Have I freaked you out yet Kyle? Heh.) Anyway, this is partly why I wanted to start all the kids saving money. If they have a little nest egg to help out come college time that decreases their need for loans, well, I can't think of any better gift to give someone. Let's get them started out right!

Comments? Questions?