3048: How Student Loans Work: Applying, Borrowing, and Paying Back by Robert Farrington of The College Investor on Student Financing

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[00:00:53] Hallo, everybody. Ich bin Greg Audino, your host hier auf ORD. Und du findest dich in einer anderen von unserer weekly bonus episodes, in der, in die, instead of reading to you myself from an article about relationship building, I share a previously aired episode from one of our other shows in our network that I think you might enjoy. Today's comes from Optimal Finance Daily, our show that covers all sorts of posts about personal finance information and how to cultivate a smart money mindset.

[00:01:20] So with that, let's hear our host over there, Diana, narrate this post for you and provide her commentary as well as we optimize your life. How student loans work, applying, borrowing, and paying back by Robert Farrington of thecollegeinvestor.com Increasingly, tuitions continue to rise, saddling millions of students with large amounts of student loan debt.

[00:01:48] In fact, the average student is graduating with almost $30,000 in student loans. At the time of this writing, that's slightly more than a Tesla Model 3 or even a wedding. Without student loans, many people would not even be able to attend college. For most anyone heading to college, student loans will become a fact of life. But where do student loans come from? How much can you borrow? And what is the true cost? In this article, you'll learn all about how student loans work.

[00:02:18] The ins and outs of student loans. Student loans are available for undergraduate and graduate students alike. They're based on need, of which income is only one component. Student loans are issued by the government, although private loans are also available. The amount issued to a student will depend on the student's financial situation. The final decision is up to the school. Financial aid packages are the first step in receiving a student loan.

[00:02:46] The financial aid package is made up of gift aid, such as grants and scholarships, loans, and work-study programs. What is the collateral for a student loan? It's important to remember that the collateral for a student loan is your future earnings. When you buy a car and get a car loan, the collateral for the car loan is the car. So if you don't pay the car note, the bank can repossess your car.

[00:03:13] With student loans, it's important to remember that the collateral is your future earnings. If you don't repay a student loan, the government can garnish your wages, take your tax returns, and more. Always keep this in mind when borrowing. How to apply for a student loan. The FAFSA, or Free Application for Federal Student Aid, must be filled out each year to receive financial aid. FAFSA deadlines change each year.

[00:03:40] Be sure your FAFSA is submitted on time. Otherwise, a late FAFSA will certainly complicate your financial situation and leave you scrambling to pay for school. To get an idea of how much financial aid you might be awarded, check out the FAFSA Forecaster website. Upon being awarded financial aid, you'll receive amounts for gift aid and loans. There should also be a breakdown of your school's costs.

[00:04:07] Schools display cost information in different ways, and the true cost can be off by a wide margin. Depending on what's shown, you may need to ask the school for costs on tuition, housing, food, travel, fees, like for labs, and books. Add in any other known cost. It's better to overestimate rather than underestimate. Many students find that they're short on money, even after receiving their financial aid.

[00:04:34] This is due to many costs that are not accounted for. How much should you borrow? Once you have an annual cost for school, subtract out gift aid and any money your parents may have saved up for college. If you have saved up money for college, subtract it out as well. The number you're left with is not only direct school costs like tuition and housing, but costs needed to live while you're in school. If you have a job, factor in how much of the cost it will cover.

[00:05:03] You should have a final number on cost at this point. That final number is the amount needed for school loans. The less money in school loans you have to take, the better. As you can see, the amount of loans isn't just about tuition and books. It should factor in all costs that are associated with being a student. One caveat about student loans. Students will often take the full awarded amount, even if it isn't needed.

[00:05:30] If you don't need the full amount, you can take only what's needed. Taking more loan money than what is needed will cost more in interest and increase your monthly loan payments. Key rule of thumb. Our key rule of thumb for how much money you should borrow is simply to never borrow more than you expect to earn in your first year after graduation. This will help ensure that you never borrow too much and can't afford to repay it. Paying back your student loans.

[00:06:00] If you have federal student loans, there are a variety of repayment plans, such as income-driven repayment plans, that can help you pay back your student loans in an affordable way. You should pick the repayment plan that you can afford to make the payment on every month. If you don't know where to start, look at using a tool like the Student Loan Planner to help you. The government offers a number of loan features that are not available with non-government loans. These include, Number one, forbearance.

[00:06:30] You don't have to start paying on student loans until after you graduate. Number two, hardship. While in repayment, you can push back payments until your finances improve. Number three, low interest. Most loans will have interest rates in the single digits. And number four, low origination fees. Fees for disbursed loans are about 1% of the loan value.

[00:06:55] If you're enrolled at least half time, you don't have to begin making payments on government loans until six months after graduating. Additionally, interest will not accrue until after graduation for subsidized loans, but starts accruing immediately for unsubsidized loans. According to the Federal Reserve, the average monthly payment is $393, with a median monthly payment of $222. How much you pay will depend on the repayment plan and interest rate.

[00:07:25] Note that graduate loans will usually have higher interest rates than undergraduate loans. A necessity for most students. With tuition continuing to skyrocket, student loans have become a necessity for virtually any student wanting to attend college. While student loans can be a large source of financing for college, planning for the costs and taking only the amount needed will help to avoid being overly saddled with unneeded debt.

[00:07:56] You just listened to the post titled How Student Loans Work, Applying, Borrowing and Paying Back by Robert Farrington of thecollegeinvestor.com. Kaffee in seiner besten Form. Mit Cubo wird jeder Kaffee auf Knopfdruck zum Genussmoment. Denn mit der neuen Cubo One Kapselmaschine von Chibo genießt du feinsten Spitzenkaffee aus besonderen Anbaugebieten. Vollmundige Aromen dank innovativer Press-Brew-Technologie und über 17 Sorten Kaffee für jeden Geschmack.

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[00:08:55] Du hast ein E-Rezept? Einfach Shop Apotheke App runterladen und direkt einlösen. Gutscheinbedingungen auf shop-apotheke.com. I have such mixed feelings about student loan debt. On the one side, there are clearly tons of benefits to getting an education. But on the other side, for many, the return on investment for that college degree just isn't there. If you're going to school to be a lawyer or a doctor, you're fairly certain that you'll enjoy it and actually use your degree.

[00:09:24] And there's a very clear return on investment that can justify the debt. That makes sense to me. But looking at some of the stats around how this actually pans out for people is concerning. According to Mark Kantrowitz, who wrote the book titled, Who Graduates from College? Who Doesn't? Less than half of college graduates graduate on time. Even after six years, less than 60% of students at four-year colleges have earned a bachelor's degree.

[00:09:50] The track record for community colleges is even worse, with less than 20% of community college students earning an associate's degree or certificate. I believe this demonstrates how many people take on student loan debt with the best of intentions. But for likely a variety of reasons, it just doesn't work out as they hoped. Maybe life circumstances causes them to drop out, or they realize that their area of study just wasn't a good fit.

[00:10:17] But now they have all that debt and no degree to even attempt to secure the higher paid job they assumed would help pay off the debt. And according to an analysis of U.S. Census Bureau of Labor Statistics and National Center for Education Statistics data for the years 1980 to 2019 by Georgetown University researchers, college costs have increased by 169% over the past four decades,

[00:10:44] while earnings for workers between the ages of 22 and 27 have increased by just 19%. It makes logical sense that a degree will lead to a higher paying job and justify the cost of that degree. But many people graduate from school and are met with the harsh reality of stagnating wages. Furthermore, a Finder.com survey found that nearly 40% of people who earn a college degree have doubts it was worth it.

[00:11:12] Of this group, 40% say it's because they aren't using their degree, and 28% say that it's because they can't find a job in their field. Many things we decide to do have terrible odds. Marriage has a 50% chance of divorce, and the overwhelming majority of entrepreneurs fail. It doesn't mean you shouldn't get married, start a business, or go to college. But I do think we should enter into these decisions with eyes wide open and continually question our assumptions.

[00:11:41] That should do it for today. Have a happy rest of your day, and I'll see you on the Sunday show tomorrow, where your optimal life awaits. Let's see you on the Sunday show tomorrow, where your optimal life awaits.