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What Your Lender Won’t Tell You About Student Loan Interest


Educational costs continue to escalate, and the most popular method of financing college educations involves getting student loans from the federal government and private lenders. What lenders won’t tell you involves the risks and repayment difficulties that these loans can generate. High student loan interest rates, short grace periods, possible unemployment after college and failure to finish your education are just a few of these risks. but you’re still responsible for repaying your loans, and repayments often start coming due immediately after graduation regardless of whether you’ve found a job.

Putting Education Costs In Perspective

The high costs of attending a four-year college continue to outpace inflation. This puts college out of reach even for relatively well-situated families — especially those with more than one child. The average annual cost of tuition and fees is $31,231, and students need housing, food, computers and books. In 1971, Harvard’s tuition was $2,600 but now costs $45,278. If simply adjusted for inflation, Harvard tuition today would only be $15,189.

Education costs have spiraled out of control, and students are left with overwhelming debt. Add the costs of tuition, supplies, living expenses and health insurance, and multiply that total by four years and four kids. It’s easy to see why even two-income professional families face incredibly financial jeopardy. Many families are forced to make their children fend for themselves. Scholarships, federal grants, low-income assistance, work-study programs, employer educational assistance and private grants does offer some relief. But federal and private loans have become the go-to choice of students and families, but maybe they shouldn’t be.

What You Need to Know Before Applying for Student Loans

Elite private colleges cost even more, so earning a four-year degree could run as much as $334,000. If all or most of that total is financed, you’d owe more after graduation than an average middle class home mortgage and be expected to make payments immediately even though you receive only an entry-level job income. You could forget about securing your own mortgage with this kind of debt. Many workers would be trapped in a cycle of debt where all their disposable income would barely cover the interest charges.

However, there are other options that include taking a year off to work and save toward an education, finding an employer to finance all or part of your educational expenses, taking affordable courses online to fulfill credit requirements and accelerating your educational timetable. The risks of borrowing to finance your education don’t just involve your own finances. It also affect how much available capital is left for other types of loans.

"Student loans have lower interest and are easier to get, but they come with a catch–they can't be discharged.”

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Total student loan debt is astronomical and has grown by 76 percent just since 2009 to atotal indebtedness of about $1.2 trillion. Many students can’t repay their debts immediately, which causes lenders to raise their rates and tighten credit policies for other borrowers. This mountain of debt adversely affects the economy, which can raise prices, and generate higher inflation. It can create similar circumstances that led to the mortgage crisis of 2008. Other serious risks of borrowing funds to finance college educations include:

Nondischargeable and Persistent Loans Follow You for Life

Student loans often have lower rates of interest and are easier to get, but they come with a catch — these loans are nondischargeable, which means that you can’t get rid of the debt through bankruptcy. The loans never go away and continue to earn interest at higher default rates if you don’t honor your repayment agreement.

Federal loan programs have even higher claims on your earnings because the government can attach your wages, keep any tax refund you’ve got coming and take other measures to collect. You might succeed in putting off your loans, consolidating them or even finding a loan at a lower interest rate, but you will have to repay the loan regardless of extenuating circumstances such as not finishing college, not earning enough money and filing for bankruptcy.

Nondischargeable student loans follow you for the rest of your life even if you go to jail, withdraw from society, become homeless or disabled or face other hardships. It’s worth considering alternatives to mortgaging your future regardless of your career plans or educational goals. You should begin planning a financial strategy to fund your education before applying for admission. The longer you wait, the more likely you’ll need to depend on securing a loan.

Grace Periods

Most student loans come with grace periods, but there are important things that you should understand first. Most grace periods last for six months after graduation so that you have time to find a job and start earning a salary, but private lenders are under no obligation to offer any grace period. Another risk situation occurs if you have a Perkins or Stafford loan and your class schedule drops below half-time status. In that case, your grace period begins immediately, so you could owe payments before you finish school.

Different loans can have different grace periods, and it’s likely that you’ll take out several loans to finance a private school education over four years. If you take a semester off to travel and backpack through Europe, you could easily trigger your loans becoming due. In general, interest accrues during the grace period, and six months of interest on several hundred thousand dollars could cost you more than you’re willing to pay just to take a breather.

Federal programs do offer better terms if you can’t find a job, become unemployed or can’t afford the payments. However, interest will accrue even if you’re given an extended grace period. Both the federal government and private lenders want their money and they’re going to charge interest on every missed payment, so there’s no free lunch for student loans.

Alternatives to Student Loans

Developing a financing strategy is critical with today’s spiraling educational costs that are likely to increase at even faster rates. Student loans make it easier for many families to finance college, so that’s how colleges were able to raise their tuition and rates higher than inflation justified. This situation extended beyond federal loans to private lenders that love nondischargeable loans that can’t be bankrupted or ignored, so these lenders made it easy to qualify for loans at interest rates that were higher than the government typically charges. More loans generate the need for more loans — such as consolidation loans and second mortgages — and produces a vicious lending circle where tuition are guaranteed to soar.

Alternatives to loans include attending community college — at least for two years — while working and saving money to finance the last two years of school. Night school, online courses, schools with lower costs, attending in-state college, working while attending school and applying for dozens of scholarships and grants are viable options of reducing educational costs. Each saving or stipend reduces the potential debt that you’ll have to repay if you need to borrow that money instead.

If you do need to borrow, shop around for lower interest rates, extended grace periods and loans that don’t accrue interest while you’re attending classes. Students who complete a FAFSA or Free Application for Federal Student Aid can borrow at least $5,500 annually through the Stafford program. The interest rates on these loans are capped, and needy students can qualify for interest-free loans while they’re attending school. The key to successfully negotiating the costs of a college education rests on taking an active role in financing your education. If you rely on loans, you might get an education in your major field of study, but you’ll also get an education in real-world economics, interest rates and unmanageable debt that you’d rather not learn immediately after graduation.

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