Facts About Student Loans

For many young Americans, college is the next step in their quest for jobs and comfortable lives. Far too many people find that college is too expensive, and loan payments after graduation are too high for them to make a living promised by society. Regardless of whether you’re looking at private or public universities, many students will need a loan to fund their education.

If you’re considering applying for funding, here are some facts about student loans that can help you determine whether a student loan is right for you and what to expect once you begin your payback period.

Types of Student Loans

There are two types of student loans available — private and federal. Private student loans come from a bank, credit union, or other private institution and can be useful for a college student who has no other form of income.

Since banks and other financial institutions issue private loans, the repayment criteria aren’t subject to federal laws and might be less flexible or forgiving. Interest rates on private loans will vary by lender.

Federal loans come from the federal government and must follow governmental regulations and criteria. These regulations help students receive an education while reducing the amount of debt they incur. Interest rates will vary depending on the type of loan you choose. For instance, Perkins Loans are fixed at 5%, while Direct Subsidized Loans are fixed at 2.75%.

When students borrow from the government or private entities, some may not know what they might be getting into. This lack of knowledge is usually due to less financial experience and a lack of guidance about the long-term issues that can arise from student loan debt.

As you educate yourself on student loans, keep these facts in mind to help you plan for the amount of debt you take on for your bachelor’s degree or graduate school studies.

Amounts Owed Vary by Education Level

Education level has a lot to do with how much students owe. A 2016 Pew Research Study found that 50% of Americans owed less than $25,000 in student loans, and 25% of that number owed less than $7,000. At the time, bachelor degree holders owed an average of $25,000, non-degree holders owed an average of $10,000, and postgraduates owed an average of $45,000.

That student debt can increase with education level is not in and of itself a mind-altering revelation, but the rising average student debt average is concerning.

Student Loan Payments Can Take Decades

According to the National Center for Education Statistics, 44% of high school graduates immediately enrolled in college, and another 26% enrolled in 2-year schools in 2018. These numbers mean that around 70% of high school graduates require financial assistance for their education or post-school training.

In 2019, Experian’s research department found that the average student debt for the year was $35,359 per borrower, that the number of people aged 50 with student loan debt increased by 5.6% that year.

The increase of student loan debt by this age group either suggests that more middle-aged people chose to go back to school or that an increasing number are pursuing graduate degrees. Pew’s study also found that roughly 20% of adults between the ages of 30 and 44 have student loan debt, while 4% of those 45 or older have outstanding student loans.

These studies’ findings indicate that student loan payback generally extends into a person’s 30s, with some still paying their loans off into their 40s. The studies also suggest that when student loan borrowers owe more, they tend to have more difficulty paying off their loans because they have trouble finding employment. Sometimes, the pay for their entry-level job is not enough to live on while paying debts simultaneously.

Income Is Related To Education

The goal of a college education is to find meaningful and interesting work while receiving a higher paycheck. Often, this appears to be the case with degree holders, as student loan borrowers’ families are more likely to have higher incomes. However, the status of their loan doesn’t appear to affect their income.

What this means to someone with an outstanding student loan debt is that while they are more likely to find higher-paying employment, having a loan or not is generally not a concern to employers. Graduates shouldn’t expect higher pay because of student loan debt. However, higher income can eventually result from loans.

What you can expect from student loans, as long as you use them to graduate, is that you are more likely to pay them off because of the higher probability of better pay.

Student Loans Affect Taxes and Credit

Interest on student loans is tax-deductible up to $2,500. If your loan is still outstanding, you can claim the interest in your deductibles. While a $2,500 deductible may not seem like much, it does serve to reduce your taxable income, which can increase the amount of money you take home. You could even use the money saved in your deduction to help pay the loan down.

Since a student loan is a loan, the credit bureaus receive your loan information and add it to your credit file once your payment period begins. This will affect your credit scores, and ratings will start to reflect your payment history, much like your credit card.

Types of Repayment Plans

Private student loan lenders may have different payment plans for you to choose from. T&I Credit Union offers private loan choices with different payment options:

  • Line of credit: T&I Credit Union will transfer funds as needed to your school. You can make interest-only payments while in school or opt to defer both interest and principal until six months after graduation.
  • Refinance your student loan: This option allows you to refinance your federal and private student loans. It’s intended for students with outstanding student loan debt after graduating. The repayment process is similar to a standard loan with an adjustable-rate.

Federal student loans differ and can be more forgiving. They often consider your discretionary income, or the money you have left after taxes and necessary spending such as bills. Many federal student loans are income-driven repayment plans:

  • Standard Repayment Plan: the amount you owe, plus interest, is divided into 120 equal payments (the 10-year standard).
  • Revised Pay As You Earn Repayment Plan (REPAYE): 10% of your discretionary income.
  • Pay As You Earn (PAYE): 10% of your discretionary income, but less than the 10-year standard amount.
  • Income-Based Repayment (IBR): 10% of your discretionary income if you’re a first-time borrower; 15% if you’re not. The 10-year standard cannot be exceeded.
  • Income Contingent Repayment (ICR): 20% of your discretionary income, or an income adjusted monthly payment over a 12-year period

Student Loan Forgiveness

Loan forgiveness, cancellation, or discharge is a topic that is near and dear to all college students. Specific programs or hiring paths can lead to situations where you may not have to pay all your student loans.

Public service loan forgiveness is a program that forgives the balance you have remaining on student loans after making 120 payments while working for a qualified employer such as a government or non-profit.

Teacher loan forgiveness programs exist for teachers who teach for five consecutive years in a low-income or educational service agency. This federal program forgives up to $17,500 on your qualified loan.

A closed school discharge is a program that discharges your student loan if your school closes while you’re enrolled. The program can also discharge your debt if you withdrew from the school shortly before it closed.

Sometimes, life takes control away from you. If something happens and you become disabled, you might be eligible for a total and permanent disability discharge. For a student loan debt to be discharged, you must have disability documentation from the Veteran’s Administration, the Social Security Agency, or your physician.

You Have More Options With a Degree

College is an exciting time for most people. In the long-run, the expenses of a student loan pay off because your job opportunities expand immensely with a degree. If you run into trouble paying off your student loans, there are many student loan assistance programs available to help you pay off your loans faster.

Contact the team at T&I Credit Union to learn more about how you can finance your education responsibly. Call us at (248) 397-9471 or send an email to us with any questions about the process of applying for a student loan.

About Willie Finch

Willie Finch spent over 20 years in the U.S. Marine Corps and has an MBA and BS in Management. He has been writing about personal finance topics for two years and has become fascinated with helping others understand their finances and reach their financial goals.