The Real Costs of Student Loan Debt
The Institute for College Access and Success reported that for the class of 2013, the average student loan debt is approaching $30,000. From an outsiders perspective, this may not seem like that much money for a great education that should get you a great job – right?
However, most students do not know exactly what they are getting themselves into when they take out these student loans. Especially when it comes to taking out private student loans as lenders provide far less resources than the Department of Education does in educating students about loans. A lot of times, interest is not explained nor what happens to the balance of the loan when the student defers payments, or even worse, forbears the loan which allows for interest to be capitalized.
Take this example:
Your original student loan amount is $30,000. The interest rate on your loan is 8.8%, which is pretty typical for a private student loan (federal loans have lower interest rates). Just like your credit cards, the lender will require that your minimum payment cover at least the interest on the loan plus a couple points. This would mean that on your $30,000, you need to make a payment of $221 a month just to cover interest and those points – barely eating away at the principal balance of your loan. If you made $221 payments, and never increased your payment nor missed a payment, you would pay your loan off in about 62 years! Not to mention that by the time you pay the loan off, you will have paid about $163,000, which is 5.4 times your original loan amount.
Even if you look at an example where a student is being aggressive in paying back their loans – over a 10 year note – the borrower would make payments of $376 and ultimately end up paying about $45,000, still 1.5 times what was originally borrowed.
The Department of Education does a great job of providing repayment options for hardship on federal student loans, but the same can not be said for private lenders. Therefore, you the borrower must utilize trusted resources to find out what your options are in order to get out of this debt more quickly and for less money than your current trajectory. There is an ability to settle your private student loans without the need for a large lump sum of money, but you need to make sure you meet with a debt attorney that has worked with student loans and knows the industry. Student loan settlement may allow you to obtain a reduced principal balance on your loan and to make payments on that settlement over a 3 – 6 year period, ultimately saving you tens of thousands of dollars.
Kevin Fallon McCarthy
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