When you go to college, you probably aren’t thinking about how much you’ll owe when you finish.
Unfortunately, that lack of knowledge can result in an unpleasant surprise when it’s time to repay your debt. Many students put off life milestones after graduation, worried that they can’t afford to buy a home or start a family.
Some states, though, hope to change the trend by requiring schools to let students know how much they will owe when they finish. When faced with the stark numbers – including the estimated monthly payment – many students are apt to borrow less.
What some states are doing to help students understand debt
On July 1, Florida started requiring higher education institutions in the state to provide students with an annual report of how much they’ve borrowed so far. On top of that, schools are required to provide information on estimated monthly payments when students finish.
This law is similar to those in Indiana and Nebraska. These laws require colleges and universities to offer detailed student debt information to their students. Next summer, Washington will also implement these changes as part of a recently-passed law.
It’s not just states hoping to provide more information to college students either. Senator Chuck Grassley, D-Iowa, introduced a bill that would require detailed information in financial aid letters. These letters would include information about your estimated monthly payment under a 10-year repayment.
If this bill makes it through Congress and becomes law, financial aid letters would also come with a disclaimer. This would let students know that they aren’t required to accept the full amount of student loans offered.
Many students are uninformed when it comes to financial aid
Lawmakers want to require more information in student aid letters because many students are woefully uninformed about financial aid. This lack of awareness could be one reason we’re facing a potential student debt crisis.
In 2014, the Brookings Institution found that about 50 percent of first-year students “seriously underestimate” how much debt they have. Another economic paper from the University of Iowa and the Federal Reserve found that almost one in 10 students are off in their estimates by more than $10,000.
One of the biggest issues, though, is that many students aren’t even aware that their student loans are, in fact, loans. The Brookings Institution research indicated that 28 percent of students with federal loans insisted they didn’t have federal debt. Additionally, 14 percent of those with federal student loans said they didn’t have any student debt at all.
Increasing the transparency of financial aid letters, and clearly stating how much students owe, could result in less borrowing. Information released in 2015 and 2016 found a drop in federal borrowing by students who were aware of their estimated monthly payment upon completion.
How to figure out your estimated monthly payment
Don’t wait for your state to look out for you, or for Sen. Grassley’s bill to gain traction. Take charge and be prepared on your own. You need to educate yourself about the potential cost of graduating from college with student loan debt.
The first step is awareness. Realize that financial aid isn’t just about scholarships and grants. It also includes student loans. Pay attention to your letter and note the loan amount offered. Write it down to provide more impact for the number.
Next, use the amount offered for your first year of school as a potential guide for what you will receive in subsequent years. If you plan to borrow $10,000 during the first year, it is likely that you will borrow the same amount in the following three years. By the time you finish school, you will have close to $40,000 in debt.
Once you have an estimate of what you’ll owe when you graduate, use a student loan payment calculator. This will help you get an idea of what you will pay each month.
In the example above, if you borrow $40,000 at 4.45% and expect to pay it back in 10 years, your monthly payment will be $414.
That’s a pretty good chunk of change. If you struggle to find a job that pays you adequately, or that’s in your field, you might have some trouble paying off your student loans. You could easily feel like you need to put off saving for retirement, starting a family, or working toward a down payment on a home.
Educate yourself before graduation day
It all starts with educating yourself, so you’re prepared (and not surprised) come graduation day.
When evaluating your student loan options, consider whether or not you need the full amount offered to you. If you can borrow less, that can save you money down the road. And that will help you reach your other financial goals, as well.
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