A Study In Student Loans

by Judith T. Parks, Ph.D

A PhD Masters Her Finances

Cap – Check. Gown – Check. Promissory Note – What?!  Such was my response senior year of college as I prepared to graduate and move on to graduate school. As I sat on the floor of my dorm room, sifting through 8 semesters of nostalgia, I found myself trying to decide what would make the journey with me to the next chapter of my life. Little did I know that these seemingly innocent pieces of paper called promissory notes would not only make it on my journey, but for at least the next 10 years, would threaten to control each and every stop along the way! That’s right ladies, what we are talking about here is the infamous student loan.

PAID- Just Sign Here?

Sometime between freshman orientation and making plans for spring break, I went to the financial aid office and signed my student loan papers- no questions asked.  What I didn’t understand was – in that instant – I had created a debt that indentured me to one of the largest banks in the United States! In a matter of seconds, at a time when it was not yet legal for me to drink or vote, I had indebted myself to the tune of several thousand dollars. I repeated this process SEVEN more times before it even crossed my mind: “What is all of this stuff? What are all of these documents? And what does the term ‘variable interest rate’ mean…? ” Over time, I slowly unraveled exactly what I had done. I had $20,000 of student loans.  A little more time, however, would pass before I would come to know how these loans would actually direct my future.

A Restriction on My Freedom & My Future

First, there would be a set monthly payment that I would be obligated to start making within 6 months of graduating – and make for at least the next 10 years. These payments would be required whether I had a job/income or not!  And that means that, at the age of 17, I was expected to know what I wanted to do with my life and my career – enough to guarantee that, in addition to all of my other living expenses, I’d be able to service a pretty substantial loan payment every month. But what if I wanted to buy a new car, a new home, start a family, or just take that fabulous bachelorette trip to Turks and Caicos with my girlfriends?

I thought, there must be some alternatives to non-payment…there is always loan deferral, right? Yes, one of the most common ways to defer your undergraduate student loans is by attending graduate school. However, one typically needs to take out even MORE loans to pay for graduate school, right? So inevitably, aren’t you just exacerbating the problem? And, in many cases, although the loan payments may be deferred, the interest is not. The interest on your undergrad loans will likely accrue each day you spend in grad school! Well, you might say, worst case scenario, I can declare bankruptcy and get rid of them?  Not so fast! You see, many student loans are backed by the US government.   As such, they are almost as hard to ‘get rid of’ through bankruptcy as are back taxes.  Basically, you’ll need to be pretty close to – or on – your death bed to gain loan forgiveness.

Get Educated!

I used my student loans as a wake up call to start learning about personal finance. I made increasing my financial literacy and financial intelligence a priority. I gathered all of my promissory notes and my most current loan statements so that I could get an accurate picture of my loan balance – principal and interest. Then, with the help of the lender, I verified that all of the loans would be deferred as long as I was a full time student pursuing a degree. I then learned which loans had the interest subsidized vs. unsubsidized. There is a big difference between the two – a subsidized loan means the interest is subsidized by the government so there is no interest charged until it comes time to repay the loan.  Unsubsidized loans charge interest from the moment the money is lent to you!  Armed with this information, I proceeded to create a plan for re-paying my unsubsidized loans while I was still in grad school!

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16 Responses to “A Study In Student Loans”

  1. Teresa O says:

    Great Article. Wish I had thought about this topic as in-depth as Judy did. Oh well, I am now armed to help my son when he begins his college career. Good thing it’s 10 to 11 years away.

  2. Marlette says:

    Fabulous! Great article on how NOT to end up in a world of debt! Priceless info! Would love to see more like it. Perfect timing for the graduation season.

  3. Renee says:

    Awesome article! I am anxious to share this info with my son who is currently finishing his first year of college! I wish ALL students had this info in order to make more informed financial decisions concerning education & finances in general! Keep it coming!

  4. Very nice story! It’s so nice to read a great success story. Nice tips too! I work for Sallie Mae and figured I’d share another great personal finance tip which fits your story – we just launched a new type of student loan that actually help students keep the college debt lower. It’s called “Smart Option Student Loan” and it requires you to keep up with interest payments while in school and uses a shorter repayment period. So, a typical freshman can save 50% in interest charges and pay off in half the time of other loans!

  5. Kim Walker says:

    Great article Judy! I will definitely pass this article on. I know many people that are struggling against the current of student loans. You bring a fresh perspective and much knowledge based on your experience. Be proud of your sucess. You are a mentor!

  6. Judith – this is very sound guidance. It is still amazing to me that a subject as important as personal finances (including debt management) is not taught to our children through out their lives. You were smart enough to work yourself out of a tough spot. This is a story that should be shared with every person entering college!

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    Appreciate the information su much.. thnx,

  10. Helpful and insightful post. Another solid update. Keep it coming! :)

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