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If you’re a recent college grad or an undergraduate degree, chances are you have student loans. Two-thirds do. For those who did borrow, the most recent estimate of the bill is $26,500 per borrower.
This amount often includes a mix of private and federal loans. As you may have heard, private student loans are a time bomb for your finances. Paying for college using private loans is like paying with a credit card. But that doesn’t stop 33% of people in bachelor’s degree programs from taking out private loans at an average of $12,550 each.
Why people take on so much debt to pay for college is beyond me. It’s so bad that some are forced to put off dreams like having kids or buying a house. But here we are, and it must be dealt with responsibly to limit the damage.
Federal Loans Aren’t the Deal You Think They Are
I’ve read dozens of books and blog posts telling me to take my sweet time paying off federal loans. Why? Because they have low, fixed interest rates. And the interest you pay is tax deductible! Plus, if you become unemployed or take a pay cut, there are several repayment options at your disposal.
Balderdash, baloney, rubbish. Interest rates used to be low, but the government is taking steps to eliminate subsidized student loans. That means most borrowing now happens at 6.8%. How is that a deal??
The tax deduction argument is overplayed. With most tax deductions, you have to spend a lot to save a little. That’s true here as well. All you doctors out there who borrowed a fortune – you’re likely getting no tax benefit, because once your annual income exceeds $75,000 (or $155,000 for joint filers) you’re not eligible for this deduction.
Federal loans do come with flexible payment plans, but these should only be used in dire circumstances. If your goal is to be debt-free on your 60th birthday, by all means deviate from the standard repayment plan. For those seeking financial independence, stick with the standard plan (10 years) and save yourself thousands of dollars in interest.
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Private Loans: So Easy to Pick on
I’m not sure how many times I’ve cautioned against private loans. I picture these loans as the fat kid with glasses and braces, sitting alone at lunch. So easy to pick on.
The dangers of private loans are real. Congress has granted private lenders incredible power to reach into your pockets if you don’t pay up. They can garnish your wages without even proving you owe a debt. The interest rates are almost always variable, and even though rates might look good now, it’s not long until they will skyrocket as the economy improves.
Remember the $26,500 figure we started with? About 20% of that is private loans. That means most of us aren’t maxing out our capacity to borrow federal loans before subjecting ourselves to this torture. (Dependent students can borrow a maximum of $31,000 total and independent students up to $57,500.) Why would you put your future self through this if you don’t have to?
Your first goal after graduation needs to be paying off any private loans. Yes, even if the interest rate is only 2.5% right now. Remember the rate is variable, which means it can change every month. These loans are a time bomb, and you should do everything you can to eliminate them from your life.
The Right Thing to do
Stressful. Tormented. Miserable. This is you with student loans in your life. Every day you wake up knowing you have that loan payment due at the end of the month. That even if you don’t pay, they can legally reach into your pocket and take their money back. You don’t need that stress in your life.
Make some short-term sacrifices now and get these clowns off your back. And later, maybe you won’t have to worry as much.