Students learned an important lesson earlier this month when the interest rate on their student loans doubled on July 1st – from 3.4% to a whopping 6.8%.
What’s that lesson? We can’t wait for anyone to do us any favours. We have to get used to doing as much as we can for ourselves.
It’s not that your political parties don’t want to help you. Both the Democrats and the Republicans wanted to avoid the hike on the student loan interest rate. But it’s the way they went about it that betrays their insincerity.
Democrats wanted to increase taxes to extend the 3.4% interest rate for another year, while Republicans wanted to link the student loan interest rate to the market. Both plans were unwelcomed, as higher taxes are always unpopular, and linking rates to the markets would subject students to the same abrupt interest rate changes that have been plaguing bonds and mortgages as of late.
So, students and recent grads, it’s time for a plan of your own with three main considerations: borrowing options, expenses and income.
First up, when shopping for a student loan provider, look past the interest rate at their entire package.
Pauline Abernathy, vice president of the Institute for College Access and Success, a D.C.-based nonpartisan, non-profit organization that focuses on college affordability, points out to the Washington Times that “though the federal interest rate increased, federal loans have more protections if students become at risk for default”.
“‘With higher federal student loan rates, students might turn to private loans thinking they are more affordable, when in reality they aren’t,’ she said, warning that those who take out private loans are at greater risk of losing a car or a house if they default.”
Besides defaulting penalties, interest rate adjustment schedules should also be carefully considered. They may start you off with low rates early on, but quickly raise them over time. Are rates tied to anything, such as prevailing prime rates? Understand too that interest rates in general are about to enter a period of steady increases which could last for a good 5 years or more. Will your student loan’s rate rise with them? Or can you lock them in now at these lower rates?
Some loans will offer lower monthly payments early on, since you will generally earn less in your first few working years, with payments increasing over time as you gain promotions and earn more. But what if promotions don’t come as quickly as you might have hoped?
The smaller the payment is early on, the more you end up paying over the life of your loan as interest keeps adding up, costing you interest on the interest as it snowballs larger. As with any loan, the more you pay early, the less you pay overall.
If you end up taking multiple loans, as many students need to, pay down the highest interest rates first. Naturally, you have to make the minimum payments on all your loans, so as not to damage your credit rating. But any extra payments should be concentrated on the most expensive loans first.
As you build up a good credit record of timely payments, look around for a consolidation loan at a better rate. At least once a year you should check if you qualify for better rates, knowing that just a 1% reduction in your interest rate from, say 6% to 5%, will over 10 years save you some $161 in interest for every $1,000 borrowed, averaging a savings of 1.61% per year for the compounding.
One more important point on borrowing… if you work out a monthly budget first, you will have a better idea of how much money you really need to borrow. Doing so will avoiding over-borrowing, which makes for a shorter road to being debt-free.
Working out a reasonable budget is tantamount to paying off a student loan. You’d be surprised at how much wasteful spending one can actually do without. Including:
• Get a bus pass. There’s a few hundred dollars a month to be saved by taking the bus instead of owning a car. Sure, it takes a little longer to get where you want to go. But you’d have a chance to read or just relax and take a breather during your busy day.
• Cook for yourself instead of eating out. Not only do you save a ton of money, but you will generally eat healthier, and maybe even eat less.
• If your clothes still fit, keep wearing them. Do you really need a new pair of shoes every 6 months? No one knows how old your clothes are but you. And there’s nothing difficult about learning how to sew. A $10 sewing kit can save you hundreds of dollars a year.
• When you do go shopping, there’s nothing wrong with the discount stores. Only you know how much you paid for your clothes. You’d be surprised how many things actually look good on you, regardless of how little you paid for them.
• And you can look just as good grooming yourself at home as at a salon. Remember that it isn’t so much that looking good makes you smile. It’s smiling that makes you look good.
• After graduation, live with family for a while if possible. The more you can pay-down your loans from the beginning, the more you save in interest. But don’t take family assistance for granted; help out around the house to show your appreciation.
• Always pay more than the minimum monthly payment. Paying just $1 extra each month for every $1,000 borrowed would over 10 years (120 months) save you some $226 for every $1,000 borrowed. Each $1 extra monthly payment would carry an effective value of $1.88 over 10 years, almost doubling in value through the interest saved.
Note too that cutting $100 from your expenses is better than earning an extra $100 at work, as you’d be saving yourself at least 5 to 10 hours of work-time which you can put toward your studies or devote to some regenerative down-time.
But if you can go out and earn that extra $100 here and there, all the better. While the hourly pay of a part-time job is everyone’s first consideration, time should be another, including travel time, in order to leave enough for your studies and rest.
Ideally, the best part-time work would be something related to one’s field of study. Creating a profile for yourself online and then forwarding links to firms or businesses related to your field offers at least two great benefits:
• Since the job would be related to your field of study, you’d gain hands-on work experience and knowledge that would help you advance through your studies more easily and enhance your academic performance.
• You would build relationships with professionals, firms and businesses in your future field of employment, which, whether you end up working for them or not, will give you excellent references and work experience that will undoubtedly help you procure employment after you graduate.
But what about your quality of life? All these sacrifices while going to school can be pretty wearisome. Just remember you are making those sacrifices in favour of your quality of life later on. It’s better to rough it sooner for shorter than to rough it later for longer.