4 Costly Misconceptions About Student Loans
Student loans may be designed to help your child become smarter, but after trying to find some, you may end up feeling pretty stupid.
It doesn't help that by the time you get to looking at student lending options, you're probably mentally exhausted from helping your college-bound kid apply to schools – and from filling out the Free Application for Federal Student Aid form, aka FAFSA, which can be completed annually by students looking for financial aid. But even if you didn't have to go through all of that, student loans are simply complicated because there are so many options.
Taking out loans also equals taking on debt, which is why you don't want to make big mistakes. In a recent report from the Institute for College Access & Success, 69 percent of 2012 graduates had an average $28,400 in student loan debt. The report, however, noted that because most for-profit colleges don't report what their students owe, that number may be higher.
Charles Wareham, CEO of Valark Financial Services in Hartford, Connecticut, says he’s seen many clients' kids graduating with $60,000 or more in student loans.
As far as monthly payments go, Wareham says, "That's at the level of having a condo mortgage without the condo."
What you don't want to do is allow your misconceptions about student loans to exacerbate your kid's student loan problems. And there are so many misconceptions swirling about, including:
False belief No. 1: No need for student loans. High grades will pay the way. It's a nice fantasy, thinking your kid's grades are going to yield a full ride. But in most cases, it’s just a pipe dream.
While full-ride scholarships do exist, they’re more rare than many parents and students realize, says Maggie Mittuch, associate vice president for student financial services at University of Puget Sound, a private liberal arts institution in Tacoma, Washington.
"The full ride or paying full-freight thing isn't the standard experience, not on my campus, or most universities, from what I've seen," Mittuch says.
So unless you've saved up everything for college, expect to take out some student loans. "With the high cost of college, it’s almost impossible for the everyday family to pay for college without debt," Wareham says.
False belief No. 2: You have to lock in student loans ASAP. Sure, it's always nice to get something checked off your to-do list, but if you're a natural-born procrastinator, that's OK in this instance.
"One of the biggest misconceptions about loans is around timing. Many families think they must make a decision about accepting a student loan very early in the process, and [that] once that decision is made, they can't change their minds," says Jill Nutt, director of financial aid at Hope College in Holland, Michigan.
Nutt works with many families who aren't sure how much money they'll need – if they even need a loan at all. "No problem," Nutt says. "Federal loans can be certified and originated well into the school year, assuming the student continues to meet all eligibility criteria."
False belief No. 3: All student loans are created equal. As your eyes glaze over while reading the fine print, you may be tempted to assume there aren't major differences between the loans, especially if you're looking at a loan you know you can get. But student loans are not created equally, and some private loans are predatory, warns Adam Minsky, a Boston attorney who devotes his entire law practice to assisting student loan borrowers.
"You can basically think of student loans as two broad groups," Minsky says. "Loans that are guaranteed directly by the federal government, and then everything else."
The “everything else” describes private loans, offered by places including banks, credit unions, state agencies and the universities and colleges themselves. "As a general rule, private loans are much more restrictive, and you don't have much wiggle room in how you make your payments. They also usually have a higher interest rate," Minsky says.
And it is dangerous not to make distinctions between federal and private loans, Minsky says, citing a former client who came into his office with numerous loans, including one for $30,000 from a private lender.
"The borrower was on some sort of payment plan – a very long plan that lasted between 20 and 30 years, and the interest rate was very high, over 10 percent, and the loan had origination fees,” Minsky explains. “Since it was a private loan, interest was accruing the moment the borrower was in school." So by the time the loan would be paid off, the borrower will have paid $100,000 in interest.
"It's mind-blowing to think that to get an education, you're going to spend $100,000 [extra] for a $30,000 loan," says Minsky, who was able to help the borrower reduce other student loans, making it easier to pay off the $30,000 private loan faster, which was loaded with restrictive contractual language locking the borrower into paying it all off.
False belief No. 4: You think your student loans are … [insert your own misconception]. Plenty of borrowers, especially students, don't understand the terms of their loans, and they end up creating their own realities. For instance, Mittuch says a lot of the student borrowers she works with either think "the loan payments will be crippling, or that paying them off won't be difficult."
She adds that her office works hard to educate the students in financial literacy, but you should help your college student at least understand how much the payments will be and when the monthly payments will begin.
Many parents evidently don't do that. Brian Quisenberry, director of financial planning at Birmingham-Southern College in Birmingham, Alabama, says he meets borrowers who don't even realize they will need to make payments after college.
"Some students seem to forget that they took out the loans," he says.
Of course, to some extent, this is understandable. You live a lot of life during four or more years of college. Between tightly scheduled classes, late-night studying, making new friends, dating, drinking, getting a hangover, having midnight pizza fests, packing on the freshman 15, working a job while going to college, pledging to a fraternity or sorority, sleeping – whatever your kids do in college, they’ll do a lot of it. By the time they leave college, those high school years, when you were all fretting about how to pay for everything, feel a lifetime away.
Plus, if your kid forgets, it may be your fault.
"Part of this may be that their parents are the ones completing the student’s loan entrance and exit counseling on their son or daughter’s behalf," Quisenberry says. "Then, when the loan payment information arrives from the servicer six months after graduation, the student either doesn’t remember taking out the loans in the first place or thinks it’s a mistake and doesn’t begin making payments."
But knowing how much fun it is to pay off debt, can you really blame your kid for wanting it to be a mistake?
By Geoff Williams for US News