#RealMoneyTalk: What I Wish I Knew About My Student Loans

A typical college grad in America comes out of school owing about $37,000 in student loan debt as of June 2019. That means about $400 per month is coming out of their paycheck and being sent directly towards their student loans. As a disclaimer, I graduated with less than $6,000 of student loan debt because of grants and scholarships, but that’s not the case for most young people today. At the end of my sophomore year in college, I decided that I really wanted to study abroad and the cost was just under $6,000 in out-of-pocket costs. I didn’t think twice about borrowing the money because I had no student loans up to that point, but in hindsight, I might have made a different choice because I was signing loan documents without any understanding of what they meant for my future or how the APR or interest rate works. 

Now, before you go thinking that I was so lucky and practically off the hook because I had so little student loan debt, let me tell you I had over $15,000 of credit card debt by my junior year of college. I combined my student loan and credit card debt and attacked the total with aggressive payments for 18 months until I was completely debt free. Here’s what I wish I knew much sooner:

If you have a high-interest rate student loan, the best gift you can give your future self is to start making payments during your first semester of FRESHMAN YEAR!

I know, I know – they all say you don’t need to make any payments until 6 months after graduation. But here’s what they don’t say… 

Interest fees don’t wait until 6 months after graduation to start accruing. Nope! If you’re responsible for the interest fees (like you are with unsubsidized loans) then you should know that the loan provider will start charging you interest fees immediately. That means the balance you borrowed (aka your principal balance) won’t be the only thing you owe back when it comes time to pay. Let’s say that you borrowed a principal balance of $10,000 at a 5% interest rate in your freshman year, but you don’t make any payments while you’re in school because you’re too busy partying – and because they told you “no payments required until 6 months after graduation.” Well, every $100 you borrowed will be charged a $5 interest fee by the end of the first year. So when you start your sophomore year, you’ll owe $10,000 principal plus $500 from interest (5% of $10,000).

So, while you’re in school focusing on graduation requirements and looking for affordable ways to enjoy Spring Break, your student loan provider is just calculating the interest charges on your student loan. See, they don’t just charge you interest once – they charge it every year or annually. That’s why there’s an “A” in APR, which stands for Annual Percentage Rate. But here’s another thing they don’t tell you:

Interest fees are charged each year on your new total balance – not on the amount that your originally borrowed when you started school. So, if we go back to our example and forward to the end of sophomore year, you’ll be charged a 5% annual interest fee again, but not just on the original $10,000 you borrowed. Nope! They’ll charge you interest on the new balance of $10,500. Since 5% of $10,500 is $525, your balance will be $10,500 plus $525 for a total of $11,025.

Following the same pattern of applying 5% each year and not making any payments while in school leads to a total debt amount of about $12,155 at the end of senior year in college. Let’s not forget that most people will still wait another 6 months before making their first payment, which allows the loan issuer to charge you 6 more months of interest fees. But, while that seems annoying, the worst part about it is that it’s a pretty good deal in the world of borrowing money. My credit cards averaged a 22.5% interest rate my senior year of college, which means my debt would be growing at a rate 4 times faster than the debt in the example above. 

College students, many of whom self-identify as broke, already have a tough time managing their finances and balancing all of the financial responsibilities that come with college. But if more students understood at 18 years old what the effects of not making payments would be on their loan balance just 3 or 4 years later, most of them would find the $10-$20 needed to pay interest fees off little by little as they accrue each month. All you have to do as a student is access your student loan portal with your username and password so that you can see what the monthly interest charges are while you’re in school. Log in every month or two and pay down the interest fees that have been charged to make sure that when you graduate, you will only owe back the exact amount of money that you borrowed in the first place. If you want to owe less, then you can hustle harder and pay even more off each month to lower your balance as much as you can by the time graduation rolls around. #GOALS

It’s super important that you know your principal balance, APR or interest rate, and any other important terms from your loan agreement so that you can make a decision about the best method or strategy for paying off the debt. If you’re not sure what the different options are for paying down debt then do some research on what type of repayment strategy is right for you.  

If your interest rate is extremely low, then you may choose to invest your money instead. If you gain 6% from investing in the S&P 500 stock market index and your student loan interest rate is 3% – then you’d still make a profit of 3% after using the investment returns to pay off your student loans that year. Be sure to consider your own interest rate when deciding which repayment method makes the most sense for you. Generally, the higher the interest fees, the more aggressive you want to be at paying the debt down.

Moral of the story — always know the terms of your loan and have a repayment strategy before you sign.