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What You Should Know Before Using a Student Loan

Before you take out money for you or your kid's education, make sure you know what you're getting yourself into.

In America, getting a college education has traditionally been an avenue for finding a good, steady job. Yet the high cost of college tuition forces many students to use student loans. As a result, Americans currently carry more than $1.3 trillion in student debt.

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Are the Loans the Problem?

Student loans are not necessarily the problem. CNBC reports that complaints against Navient (formerly Sallie Mae), America's largest student loan company, rose over 800 percent during November 2016 to January 2017 from the same period the previous year. The Consumer Financial Protection Bureau (CFPB) says the company received more consumer complaints than Bank of America, Wells Fargo, or even credit reporting agencies such as Experian. This increase in complaints coincided with a CFPB lawsuit against Navient for questionable practices.

Causes for Complaint

In a September 2016 CFPB article Seth Frotman reports troubling practices among loan servicers. One method is lowering monthly payment amounts, which extend the life of the loan and increases the total interest paid. Termed “redisclosure,” this practice of changing repayment terms allows the servicers to reset repayment schedules. In the long run, lower monthly payments cost more, making it even harder to pay off student debt.

Frotman says, “Redisclosure can also occur when your student loans are transferred to a different servicer, a servicing practice that has affected more than 10 million student loan borrowers since 2013.”

Another questionable practice happens when a borrower pays extra in hopes of reducing their debt sooner. In some cases, servicers apply the extra money to future payments instead of immediately applying it to the principal. As a result, the next statement doesn’t reflect a change in the principal. Frotman also offers ways for borrowers to protect themselves:

Make requests for applying your money - Ask for instructions to be added to your account that request extra payments be added to the highest interest loan instead of advancing your loans’ due dates.

Check your account regularly - Don’t assume that paying on time keeps you on track to meet goals. Be sure your servicer has not lowered your monthly payment and that your money is being used according to your requests. 

Ask questions - Contact your loan servicer and ask for explanations if something doesn’t look right.

File a complaint - If you believe your loan servicer is treating you unfairly or is not honoring your requests, contact the CFPB.

Dangers of Student Loans

Upon graduating, student loans are like a bad cold that won’t go away. Those who are fortunate enough to turn their newly-minted degrees in jobs may pay a significant portion of their salary towards student loans. Although they are easy to get, some dangers come with student loans:

Unfinished degrees - Not everyone finishes college. If some unforeseen circumstance causes you to drop out, you’ll have nothing to show for it but debt.

Difficulty finding a job - An estimated half of recent college graduates are underemployed. Also, a significant number of graduates work minimum wage jobs. Choosing an unmarketable field of study makes finding a job difficult. And without decent employment, paying off loans is more difficult.

Lingering debt - The average college-aged individual would probably never borrow $30,000 to buy a new car. Yet that is the average individual debt of student borrowers. However, unlike car payments which are usually paid off in a few years, paying off student debt can take a decade or more.

Inability to repay - If you finish college with a degree and are either underemployed or unemployed, you are still responsible for your student debt. Unlike other types of debts, the only way to get rid of student debt is to pay it. Even bankruptcy won’t get rid of it. If you cannot repay your loans, your wages could be garnished, or the money could be taken out of your social security in the future.

Make Wise Choices

Even when a person faithfully pays on their loans every month, it can still take years and years to get rid of these loans. Being smart about students loans should begin before entering college. Below are some tips for making wise choices regarding student loans:

●Apply for scholarships and grants -- this extensive FAFSA guide will help you figure out if you are eligible for the Free Application for Federal Student Aid, and how to prepare for and use the form.

●If you take out student loans, read the fine print and be sure to understand terms and fees before signing.

●Don’t borrow more than you need to cover the costs of your education. Steer clear of borrowing to cover living expenses, food, travel or entertainment.

●Learn about the degree you wish to pursue. Specifically, find out how easy it is to get a job with that degree.

●Once you have your degree and begin repaying your loan, keep track of your payments to make sure the loan servicer is treating you fairly.

 

Avoiding Debt, If Possible

The choices you make today regarding student debt will affect you for years and years. Today, educate yourself, know what you are getting yourself into, and borrow responsibly.