By Dan Perez and Jen Maldonado
It may affect what school a student chooses to attend. It may decide what a student will do after graduation. Debt caused by student loans is an issue that crosses the mind of many college students.
In an era where a bachelor’s degree doesn’t guarantee immediate employment, understanding student loan options and the potential outcomes is crucial to preventing financial instability.
Several tips can help students decide how they are going to borrow money in order to attend college, according to Jamie O’Hara, vice president of Enrollment Management at Rider.
“Become an informed consumer,” O’Hara said. “Understand your total educational investment, including the future cost of all loans and consider all other resources before borrowing.”
Students are well advised to exhaust their federal student loan options before considering a private loan.
“Federal student loans offer borrowers many benefits that are not typically found in private loans,” he said.
These benefits include fixed interest rates, flexibility in choosing a repayment plan, income-based repayment plans, and loan forgiveness and deferment options. Private loans, on the other hand, often have interest rates that can fluctuate, require a credit check and do not provide the same flexibility federal loans do.
Julia Layton, contributing writer to a Discovery Channel website, agrees with O’Hara’s view that students should attempt to stick only with federal loans.
“Avoid private loans if you can realistically squeak by on federal loans and grants, which often have lower interest rates,” Layton wrote.
O’Hara stressed that keeping track of one’s financial information, such as knowing one’s personal amount of student debt, is another way to manage loans and avoid falling behind on repayment. The lender contact information and the interest rates and repayment options of the loan are essential components students must be aware of.
Additionally, developing a budget and sticking to it, along with making realistic choices and avoiding any unnecessary costs are ways to minimize debt overall.
“Never borrow more than you need for educational expenses, even if you are eligible to borrow more,” O’Hara advised.
Layton agrees with O’Hara’s advice.
“If you’re going to have to put more than 10% of your pre-tax, post-graduation income toward loan repayment, you’ve borrowed too much,” she wrote.
When it comes to paying back the money students borrowed, O’Hara said students should pay on time each month and never miss a payment.
At Rider, O’Hara explained that a “personalized counseling approach rather than any one-size-fits-all rule” is applied when it comes to helping students figure out their financial situation.
“We actively work with students to minimize their educational expense,” he said. “For students and parents seeking supplemental loans, we provide detailed consumer information and counseling.”
Financial aid counselors at the university encourage students who are taking on debt to consider various issues that will impact the students after graduation, such as their expected income, future living expenses and how much they will have to pay each month if they take out a loan.
Total student debt has nearly tripled during the last eight years, with about 37 million Americans sharing about $1 trillion in these loans, according to a report from the New York Federal Reserve released last month.
About two-thirds of all undergraduates at four-year colleges in the country graduate with an average debt of $22,656, according to finaid.org, a resource on school financial aid. At Rider, the average debt was $35,449 in 2011, according to a report by the Project on Student Debt, a branch of the Institute for College Access and Success. The study also stated that 72% of graduates finished their Rider education with some kind of student debt in 2011.
How Much is Too Much Student Debt?
Federal student loans are funded by the federal government while private student loans are made by a lender like a bank or credit union, according to studentaid.ed.gov, a resource on student financial information provided by the U.S. Department of Education.
Another key difference between the two loans is that federal student loans include benefits like fixed interest rates and income-based repayment plans that aren’t typically offered by private student loans.
“We frankly prefer that students apply for federal loans,” said O’Hara said.
The College Scorecard, a tool created by the Department of Education, states that families typically borrow $23,100 in federal loans for a student’s undergraduate study at Rider. The federal loan payment over 10 years for this amount is around $265 per month.
According to the College Scorecard, 7.4% of borrowers from Rider defaulted on their federal student loans within three years of entering repayment. The national average is 13.4%.
‘A Difficult Position’
Some students haven’t had an easy experience with their loans and decided to take on more than they could handle. Gabriel Gray, a Rider alumus, signed up for a $12,000 private unsubsidized loan from Rider his freshman year.
“I didn’t know about the pitfalls that come with student debt,” said Gray, who attended Rider from 2000-04.
Only two classes away from completing his bachelor’s degree, Gray chose to leave school to work full-time. He returned in 2010 to finish those two courses.
One thing didn’t stop during Gray’s absence from college— the accrual of interest on one of his student loans. From 2004-12, he didn’t pay any of the $9,000 interest that had accrued. He discovered what the total amount had risen to last year, when he needed his official transcript from the university but it was withheld from him because of his outstanding debt.
Rider serves as the lender and servicer of the private loan the student took out. The repayment period was 10 years during which the amount is expected to be paid back directly to the college. In 2006, the college began to limit these types of private loans to a smaller number of students who are not eligible for other private loan funding, said O’Hara.
“Rider officials work with students who are experiencing difficulty paying back their loans,” O’Hara said. “Unfortunately, when a student doesn’t follow through on his or her obligations over an extended period of time, or does not maintain good communications with staff, he or she may end up in a difficult position. This did not occur in this student’s situation, even though Rider made a special effort to reduce the requirement for a one-time release of the transcript.”
‘I Didn’t Think Ahead’
For Aislin Lavin, a former St. Joseph’s University student, college debt and loans were also a confusing world to navigate.
Lavin, who attended St. Joe’s from 2006-10, took out mostly private unsubsidized loans directly from her college and several federal subsidized loans. The total dollar amount, including several years of interest, of all of her loans, came to nearly $80,000. She said she has been paying “big chunks” out of the total for the past two years.
“Each month I pay the minimum allowed for my loans, which adds up to about $750 to $800,” said Lavin, who lives in Norristown, P.a.
She expects to be able to pay off up to 80% of her federal loans during the course of her time with the Peace Corps. However, she thinks it will take her around 20 years to completely pay off her private loans.
Lavin said she wishes she had been aware of ways to begin paying off her student loans while she was still in school.
“There was no discussion of options by the universities I was in contact with nor the banks,” she said. “I didn’t think ahead about how I was going to be able to pay off my loans.”
A New Hope
Not all students have had trouble when it comes to figuring out to responsibly pay for their college tuition.
“By the time I graduate, I’ll have about $18,000 in federal loan debt,” said Michael Zahorsky, a junior Radio and TV major at Rider.
Zahorsky made sure not to take out private loans because he knew federal loans came with more flexible repayment terms.
“I planned out how much my Stafford loans would cover and was happy to find out that I didn’t need any private ones,” he said. “I’m glad that I sat down and read about different types of loans because borrowing this much money could have a huge impact on my life after I graduate.”