There’s an unfortunate paradox when it comes to college kids making decisions about money. At this point in our lives, our financial experience is at an all-time low while the impacts of our decisions are at an all-time high. Sure, a student loan sounds like the perfect way to assert your independence and take hold of your future, but do you know that you’ll be paying monthly for it post-graduation? Do you know if interest will begin to accumulate while you’re in school?
We reached out to Xavier Lanier, contributing author for the online publication MoneyNation, to throw a lifeline to college students before they jump in over their heads.
Q: What is your number one tip to help college kids keep an eye on their budget?
A: The single best thing to do in college is to become best friends with your mobile app. The budgeting function is making sure you have the reserves.
Q: How often should I check my accounts?
A: You should be using online checking, and if you aren’t, sign up for a service. You need to log in once a week and make sure there are no charges you don’t recognize. The sooner you see an issue, the easier it is to take care of it. It’s really hard to remember the exact dollar amount otherwise. Also, make sure you always avoid going under zero because you accumulate charges. Insufficient funds are about $35 per charge.
Q: Which loans do you recommend for students?
A: In the perfect imaginary world, you’d have none. But the federally-backed loans are where you get deferred payments and interest, and you’ll only get that there. Right now, the Republican office has these available for certain service sections of the economy such as nonprofits or for the government. There’s a range of jobs where you qualify to make payments based on your income. Obama decided to do this to give incentive to other careers besides the highest paying jobs. It’s pretty tough to take out a bunch of loans and then teach at a public school.
If you’re a freshman, you won’t know if the program will still be instated when you graduate, but it’s there. All the government incentives you hear about will be related to federally-backed loans. These are not going to happen on the more aggressive loans, or from parents taking out a second mortgage.
Q: What are smart strategies for taking out loans?
A: If you are taking on $10,000 or $100,000 in loans you need to consider your ‘outs.’ Say you have $150,000 in loans and you didn’t work a lot–your payments will be high, even based on your income. If you put in 10 years of service as a teacher, doctor or at a nonprofit, and you make all your payments and apply for the government incentive program, the money will be discharged.
Public versus private loans is a huge difference. A lot of times people take out too much debt they don’t need to take out. Get a minimal amount of loans. Don’t take the maximum offered for you. There’s no rule that says “take all or none,” whether it’s from a school or a private lender. Not to say you shouldn’t always take out the minimum to get by, but I made the mistake of taking $5000 in loans from my school when my parents were going to help me. The school was going to give me free money for a few years, right? The idea was that $5,000 would be nothing when I graduated, but in my example, I graduated two months after 9/11. Even if you had a job secured months ahead of time, they were all rescinded. It was a bloodbath.
Q: What are some risks students don’t take into account when making financial decisions?
A: It’s really hard to predict–especially in your early years in college–what will happen in four or five years. It becomes a lot more real when you have to break out your first paycheck. After taxes, you won’t be making as much as you thought. Really quickly it becomes a huge, huge burden. Student debt often never goes away. I had a friend whose mom swore up and down she’d pay for student loans and then she got a bad back. She still had to work a minimum wage job at a coffee shop to pay for student loans. These things are very real.
Q: What should students watch out for in loan payments for tuition?
A: For some loans, interest starts accumulating when you’re in school and not a lot of people know that. If you’re racking up $10,000 a year, you’re not graduating with $40,000 of debt–you might walk out of school with $45,000 or $50,000 depending on your loan. I didn’t bother checking up on my accounts in school, but I would say that you always want to check in at least once a year on what interest is accumulating.
The loan industry sells you on the minimum monthly payment. They’ll never give you an accumulative payment. The number they and everybody will be focused on is the ‘right now’–if I’m taking $10,000 out right now for $100/month, they don’t add in the previous years’ numbers, they just focus on the current value. A friend of mine had a loan for $120/month but it was really $480/month because of every year she was in school. Definitely look at those numbers.
Also, you really need to look at the payment schedule. For example, for federal student loans, they do what is called ‘graduated payment plans’ because they assume you’ll be making less money when you graduate and more when you’re 30 years old. $60/month can become $120-150/month because they plan on your salary increasing. You need to ask for the payment schedule with student loans and ask exactly what you’ll be paying each month for each year. Mine literally doubled over ten years. They do this with some loans to make it easier when you graduate, but then it becomes harder. Details are very, very important so you have a real picture of what it looks like. If you get a master’s degree, you typically defer payments until then.
Q: What are the implications of co-signing a loan?
A: This is something to consider because the responsibility of paying back the loans isn’t just for your own good, but it’s also for your parents, uncle, grandparents or whoever signed on it with you. It’s a bigger picture than just you if you are co-signing it. They are just as responsible as you are. If you miss a payment, they’ll harass your parents about it because it’ll affect their credit score.
At some point, you have to have open conversations with your family members about what would happen if something went wrong. Would you be able to make the payments and for how long? You have four years to figure it out, so you can adjust your financial aid strategy every year. For some people, this is not very pleasant to think about, and once some people sit down and figure out how much debt it is they’ll switch schools. But it’s nearly impossible to make a livelihood without a college degree.
About the source, Xavier Lanier: A 2001 CalPoly alum, Lanier writes for Moneynation and is the publisher of Gotta Be Mobile. His focus at MoneyNation is both business and financial advice for college students.