A recent article I saw over at Bloomberg showed me why the student loan crisis is so bad in this country. Apparently most Americans’ student loan knowledge is approximately zero. When you don’t know what you owe, who you owe it to, or the different payback strategies that are available, how can you ever crawl out of the hole? I’m going to review several of the most shocking findings from this survey, and then provide some thoughts as to what you can do to increase your financial literacy in this important area of personal finance. No one wants to end up like Obama or Rubio who both were paying their loans off until their mid 40s.
Just How Bad Is Millennials’ Student Loan Knowledge?
I’ll include a various smattering of the most unbelievable statistics. The survey was conducted by Lendedu, a company that reviews student loan refinancing options.
- 6% of students knew how long the loan term was for
- 8% knew their interest rate on the loans
- 10% knew which loans were racking up interest and which were deferred
- 73% basically thought Sallie Mae was someone’s grandmother and not a student loan company
- 59% thought that total outstanding student loan debt was in the millions of dollars. The correct figure is well over a trillion
- Only 38% knew how much they had borrowed
- 48% had no idea what their college charged for room, board, and tuition
- Only 28% knew that the government can garnish your wages, tax refunds, and even Social Security checks to get their loan money back
- Just 37% knew that student loans do not get wiped off the books in bankruptcy, making them one of the worst kinds of debt.
How Millennial Moola Will Be Part of the Solution To Increase Student Loan Knowledge
I intend to write more about this topic, because it affects so many millennials and there is such a great need out there. I’ve already explained how you can get your student loans forgiven tax free without impacting your credit score. I plan on writing several posts on the different payment plans and what you need to know when selecting one. I’m also going to write about the big mistake most people make when they have really large student loans.
A big concern of mine is that there are so many student loan refinancing companies out there. They try to educate folks on their options, but the reality is that they get paid only if you refinance with them, which gives them a big incentive to get you to do that. There are big reasons why you might refinance and why you would want to hold off, but if you are like the people in this survey and don’t know about your loans, wait to get educated.
Student Loan Basics 101: Major Repayment Plans Available
Knowing which repayment plan you should use hinges on knowing your career plans. If you are going to be working in the private sector making a high income, you should probably refinance and try to pay down your loans as fast as possible. If you’re working for a tax exempt institution under the IRS code, and it pays big to know if you are, you should probably be going for the PSLF program (Public Service Loan Forgiveness). It includes basically all major not for profit entities like schools, hospitals, local government agencies, federal government entities, and charities like the Red Cross or American Cancer Society. If you work for one of those not for profits you need to know the loan rules backwards and forwards because you could save a six figure sum if you play your cards right. Here are the main plans:
Income Based Repayment (IBR): You pay 15% of your discretionary income to the government on your student loans. Max you pay is your standard 10 year loan payment, so it’s capped even if you’re a high income earner. This program is older and you are probably only using this one if you had loans before 2012.
Pay As You Earn (PAYE): To me, this is the most attractive plan if you’re going for the PSLF loan forgiveness, but it’s the most dangerous if you plan on paying your loans off because you’ll have a higher balance. You pay 10% of your discretionary income on your loans and it’s capped at a max of what you’d pay on the 10 year standard plan.
Revised Pay As You Earn Program (REPAYE) : This is the newest student loan payment program. It’s kind of funny that the acronym is REPAYE because you will be very unlikely to repay all your loans with REPAYE. It is the same as the PAYE with 10% discretionary income payments. The big difference is there is no cap on what you can pay. Very bad plan if you’re a medical resident going for loan forgiveness and are about to become an attending with a large salary.
Standard Repayment Plan : This is a 10 year, level payment like you’d find with a mortgage. The loan balance is amortized, which is a fancy word for calculated to produce one monthly payment that stays the same that will result in full loan payoff. Say you have $100,000 in debt. You might get a monthly payment of $1000 that stays the same every month for 10 years. This payment amount calculated at the beginning of your loan is the cap for what you pay on the earlier programs (everything but REPAYE).
Take Charge of Your Finances and Expand Your Student Loan Knowledge
People take out $200,000 in debt and make no effort to learn about what they can do to pay it back. Don’t be one of them. If you read Millennial Moola, I’m going to make a strong effort to put enough material out there to give you a base level of education on managing student loan debt. It’s easy to feel powerless under a crushing debt load. The good news is that there are so many things you can do now, from going for loan forgiveness to refinancing your debt to a more reasonable interest rate, rather than the 6.8% a lot of people pay.
Learning how to handle your student debt load will give you the confidence to manage other areas of your financial life, be it saving for retirement, buying a house, or saving for your kids’ college. If you have a unique student loan situation and would like to be considered for a free case study to be pubished on the site, feel free to email me at [email protected]. You don’t have to do this alone.
Any personal stories about your student loan journey? Did you make any mistakes that others can learn from? Comment below!
Thanks for doing this! Going to send all my friends who don’t understand their loans here.
I’m curious if you’ve reviewed any of the loan entrance counseling documents? Do students just click through these? In theory, all of these things have to be disclosed.
In my experience working with folks who have been through mandatory student loan exit counseling, the counselors do not understand the rules themselves. Most are not math oriented people and recommend one payment plan over another based on the fact that “everyone chooses it.” I would imagine the entrance disclosures are ignored on the premises of, “I know I’ll owe a ton and wont ever be able to pay it back.” Many folks tell me they’re hopeless and figure they’ll be in debt forever. Its important to try and change that attitude BC there’s literally so much that you can do.