Debt, Student Loans and Monthly Payments: Did You Count the Cost?
Debt, Student Loans
Debt, student loans and college tuition often seem to go together in the same thought process. When parents talk about sending their teen or young adult off to college, one of the first troubles on their minds is, “How am I going to pay for this?” Almost every college’s answer to this question is, “Take out a student loan!”
The officer in charge of approving student loans makes the process sound so easy. Just sign some paperwork, and you’ll get free money for a seemingly low interest rate. This option sounds appealing to many. If you’re a young, single mother going back to school to finish your degree, this means you get to keep more of your money now for raising your child. If you’re a couple who has a mortgage to pay and two students to put through college at the same time, this option sounds even more beneficial.
The Truth About Debt, Student Loans
There’s an ugly side of debt, student loans and tuition that many loan officers don’t tell you about. It’s called cumulative debt. If you actually knew the damage cumulative debt can do to your finances, you might think twice about signing off on an expensive student loan.
Let’s say you take out a loan for $10,000, depending on the interest rate at which you borrow this money, you might end up paying between $3,000 and $5,000 in interest alone. Thus, you’re not just borrowing and paying back the $10,000 that you were loaned, you’re paying on the interest that has accumulated during the months that you’ve had that money.
This is what many students and parents alike fail to factor into the cost of their debt, student loans and interest rates. The problem is even if the figure you originally borrow sounds low, it will turn out much higher in a few years when you must pay back the final sum.
What Do Most Debt, Student Loans and Cumulative Debt Figures Look Like?
That’s a good question. You might be surprised at how high some of the numbers are in many cases. Realize, first of all, that Associate’s and Bachelor’s degree students will suffer much less debt than Master’s or Doctoral degree students. Additionally, whether you attend a public or private institution will also play a role in determining the overall cost. In most cases, private school debt is much higher than that of public institutions.
Let’s take a look at a few numbers for the private sector. These are schools that are not state-funded and/or are religiously-oriented schools. Additionally, some private schools are for-profit, while others are not-for-profit. If they are a for-profit private school, the cumulative debt is sometimes (but not always) much higher than in the case of a not-for-profit school.
On average, it’s not uncommon for schools in the private sector to cost anywhere between $10,000 and $18,000 for an Associate’s degree and up to $36,000 for a Bachelor’s degree. Naturally, these figures are averaged; some students borrow less, while others borrow much more.
In the public sector, however, figures are on par or lower with these rates. A student getting a two-year degree might look at $6,000 to $7,000 for a two-year degree while four-year degrees might total around $22,000.
Cumulative Debt and Negative Amortization
So you already know what cumulative debt is. But what is negative amortization, and what effect does this have on your loan?
When your debt accumulates, this is called cumulative debt. Negative amortization is its close cousin, but it’s even more detrimental to your finances. Negative amortization is the effect that happens when a borrower defers payment for some reason. Perhaps they can’t make a loan payment that month, or they forgot to do so.
When this happens, the interest that the borrower neglects to pay gets added to overall balance that you originally borrowed. This makes all of their following payments higher, especially if negative amortization accumulates over a number of months.
That’s why it’s so important to make loan payments every single month. Any payments that you don’t make just pile up, until the amount you owe at the end of your loan term is absolutely staggering. There’s a reason they call it a “debt burden.”
So all in all, when you’re looking at getting a student loan, don’t look at just the loan amount itself. Remember that there are other factors to bear in mind. For instance, what will you do if you cannot pay off your loan payments for a few months? Are you prepared to take on the cost of the additional accruing interest?
Making monthly loan payments your top priority will help you keep your debt burden to a minimum. And don’t be shy! Make a list of questions to ask the person in charge of permitting your loan so you don’t get any unwelcome surprises when outlining your potential debt, student loans and overall college tuition payment plans.
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