Barbara Thomas, Executive Vice President of Education Loan Finance (ELFI) provides some financial advice to college students based on her own experiences in college.
Hello, I’m Barbara Thomas. For most, like me, my college days were a great experience that lead to incredible personal growth. I had a marvelous sense of freedom and made many new friends. However, I have spent much time reflecting on what I would do differently if I could begin my college life all over again, given what I know now. Hindsight is a wonderful thing, isn’t it? So here’s my advice to all of you who are preparing to enter college, or are currently in your freshman or sophomore years.
Choose an Affordable College
When looking for the right college, don’t get beguiled by a famous name and a beautiful campus. And, while a state-of-the-art fitness center or an Olympic-size swimming pool might be important if you’re an athlete, most of the time you will be paying for them in higher college fees. Instead, make sure to keep your eyes on finances, as affordability should be a top concern. Considering the fact that many students end up taking on sizeable student loan debt, keep in mind that you (most likely) won’t be living on that beautiful campus in your late 20s or 30s.
Rethink Your Path to the Best Education.
Just because a college is more expensive, doesn’t necessarily mean that it’s better
than one that costs less. You should look upon college as an investment in your future. Consider what the return on investment (ROI) from your college education will look like. In other words, analyze which college is likely to provide you with the most bang for your buck. Here’s a report from U.S. News & World Report
that gives you the ROI of different colleges.
Look at Alternatives to a Four-Year College.
If you find out that college is not the best path for you, it can turn out to be an expensive mistake. Keep in mind that dropping out of college won’t make your student loans disappear. So before you enroll in a college, consider these alternatives:
- Take a gap year to earn money to put toward going to college and give yourself more time to decide what you want to do.
- Consider attending a trade school to learn a valuable skill with high earnings potential.
- Spend two years at a community college. Attending a community college can help you save on tuition. However, if you plan to transfer to a college of your choice, be sure to do some checking. Find out how many transfer students are accepted and how many of your community college credits can be used.
Do your research and crunch the numbers to make sure you’re making the best choice.
Earn More While in School
A survey of millennials
found that earning money while in college was the number one thing that participants wished they had done (or done more of). This reflects the increasing financial cost that goes along with obtaining a college degree. The College Board
estimated that in 2017 (updated figures are available), the average student loan debt upon graduation was $28,500. Keep in mind that a heavy debt load is going to affect your financial future – your ability to buy a home, start a family, and save for retirement. Apart from financial considerations, there is no better way to acquire real job skills than to hold down a job and learn about its demands firsthand. Employers know this, which is why previous work experience is the most popular measure to assess job candidates, even those straight out of college.
Research Ways To Lower Your Monthly Student Loan Payments
So, you’ve done everything right - you chose the higher education path that was right for you, and you have landed an interesting job. Now, what about those student loan payments? Are they weighing you down and preventing you from leading the life that you had envisioned after college? ELFI
has a solution to your problem – it’s called refinancing. You can close out your original loan and take out a new one with a lower interest rate and/or a longer term. This can significantly lower your monthly loan payments. Get in touch with us
to see how we can help you!
Terms and conditions apply. Subject to credit approval.
When you take out a student loan, you will not just be paying back the amount you borrowed – the lender will also charge you interest. The easiest way to think of interest is that it’s the cost paid by you to borrow money. Whether you take out a private student loan or a federal student loan, you will be charged interest on your loan until it is repaid in full. So, when you have finished paying off your loan, you will have paid back the original sum you borrowed (your original principal), plus you will have paid a percentage of the amount you owed (interest). Properly understanding the way that student loan interest affects your loan is imperative for you to be able to manage your debt effectively.
The Promissory Note
When a student loan is issued, the borrower agrees to the terms of the loan by signing a document called a promissory note. These terms include:
- Disbursement date: The date the funds are issued to you and interest begins to accrue.
- Amount borrowed: The total dollar amount borrowed on the loan.
- Interest rate: How much the loan will cost you.
- How interest accrues: Interest may be charged on a daily or monthly basis.
- First payment date: The date when you are expected to make your first loan payment.
- Payment schedule: When you are required to make payment and how many payments you have to make.
How Different Types of Student Loans are Affected by Interest Rates
Here’s an example: In your freshman year, you borrow $7,000 at 3.85%. By the time you graduate in four years, this will have grown to $8,078 – an increase of $1,078. Here’s the math: 7,000 × 0.0385 × 4 = $1,078 (Click here for ELFI’s handy accrued interest calculator.)
- Government-Subsidized loan: If you are the recipient of a government-subsidized direct loan, the government will pay your interest while you are in school. This means that your loan balance will not increase. After graduation, the interest becomes your responsibility.
- Parent PLUS Loan: There are no government-subsidized loans for parents, and regular repayments are scheduled to begin 60 days after the loan is disbursed.
- Unsubsidized Loan: The majority of students will have unsubsidized loans where interest is charged from day one. If you have this type of loan, sometimes a lender will not require you to make payments while you are still in school. However, the interest will accrue, and when you graduate you’ll find yourself with a loan balance higher than the one you started with. This is known as capitalization.
How is Student Loan Interest Calculated?
When you begin to make loan payments, the amount you pay is made up of the amount you borrowed (the principal) and interest payments. When you make a payment, interest is paid first. The remainder of your payment is applied to your principal balance and reduces it.
Let’s suppose you borrow $10,000 with a 7% annual interest rate and a 10-year term. Using ELFI’s helpful loan payment calculator, we can estimate your monthly payment at $116 and the interest you will pay over the life of the loan at $3,933. Here’s how to determine how much of your monthly payment of $116 is made up of interest.
1. Calculate your daily interest rate (also known as your interest rate factor). Divide your interest rate by 365 (the number of days in the year).
.07/365 = 0.00019, or 0.019%
2. Calculate the amount of interest your loan accrues each day. Multiply your outstanding loan balance by your daily interest rate.
$10,000 x 0.00019 = $1.90
3. Calculate your monthly interest payment. Multiply the dollar amount of your daily interest by the number of days since your last payment.
$1.90 x 30 = $57
How is Student Loan Interest Applied?
As you continue to make payments on your student loan, your principal and the amount of accrued interest will decrease. Lower interest charges means that a larger portion of your payments will be applied to your principal. Paying down the principal on a loan is known as amortization.
How Accrued Interest Impacts Your Student Loan Payments
The smart money approach is avoiding capitalized interest building up on your loan while you are in school. This is because choosing not to pay interest while in school means you will owe a lot more when you come out. The more you borrow, the longer you are in school, and the higher your interest rates are, the more profound the impact of capitalization will be.
How to Find the Best Student Loan
When looking for the best student loan, you naturally want the lowest interest rate available. With a lower interest rate, the same monthly payment pays down more of your loan principal and you will be out of debt more quickly. Talk to ELFI about our private student loan offerings by giving us a call today!
Terms and conditions apply. Subject to credit approval.
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