Understanding Student Loan Debt

Over the last 20 years, loans have replaced grants as the primary source of financial aid to college students. The first principals of student loans are that they make going to college more manageable financially and they must be repaid with interest. This is true regardless of whether you graduate or not. The decision to borrow and how much to borrow is a central question for many families and students. Determining if college is affordable and which college(s) a student can afford is often a difficult and agonizing debate.

How much debt individuals are willing to incur to finance a college education is an extremely important and necessarily individual decision. Many people are concerned about borrowing too much. Every family and student should be aware and informed about the opportunities and impact of student loan debt.

How Much Debt is Too Much
Excessive debt is that which alters perceptions of opportunity.

• Any debt, which influences a student's actions or choices.

• When the amount of debt is a surprise.

• Any debt, which results in early year cash flow crisis. 

• When the amount of debt forces you to change your goals.

• For undergraduates, excessive debt is that debt which unnecessarily uses up allocations of subsidized loans.

• When monthly student loan payments should exceed 8 to 10% of gross monthly income.

• When educational borrowing exceeds the gross salary of the first job after graduation.

• When students over-estimate their income and thus over-estimate what they will be able to realistically afford in monthly payment, once they graduate. 

• Any debt which comes as a surprise at the time required repayment begins

For an individual student, at a specific school, with specific occupational and earnings outlooks, there most likely is a threshold beyond which debt is not manageable and is hence unreasonable. There is general agreement that as debt exceeds 15% of gross income it becomes more difficult to manage. The key to determining the exact threshold of debt manageability for a specific person is the borrower's prospect of achieving their goals while assuming their loan repayment.

See the Education Resource Center section on How Much Debt is Too Much Debt for an in-depth discussion on this topic

How Much Debt Do College Students Acquire
Students in their final year at college who borrowed money to attend college owed between $1,000 and nearly $18,000. More specifically, slightly less than a third of public 2-year students were in debt, while over half of all students at 4-year colleges were. Seniors with loans who attended public 4-year colleges, acquired typical debt that ranged between $5,000 and $14,500 while their private counterparts average debt was 70% and 23% higher ranging between $8,500 and $17,900. Final year students at public 2-year colleges ranged from $1,000 to $5,000.

Total Indebtedness Among Final-Year Full-Time
Students

How Much Income is Sufficient to Repay Student Loans

This table shows the monthly payments required to repay various levels of student loan debt over the typical repayment period of 10 years. Within the lending community, payments that constitute between 5 to 15 percent of a new college graduate's income (before taxes) are manageable - the lower the percentage the more manageable the payments are. You will also find information about the amount of income that would probably be sufficient to comfortably repay varying levels of total educational debt. The sufficiency of any income, of course, depends on what other expenses you have. Therefore, these figures are only rough estimates. This example uses an 8 percent payment to income ratio to estimate sufficient income levels.

Based on this ratio of payments to income, students borrowing $2,500 each year during a 4-year college career, for a total of $10,000 in loans, will need to find employment with an income of at least $18,400 in order to be able to comfortably manage repayment. In this case you have to pay $123 every month for 10 years to repay this debt after you complete your studies.

Amount Borrowed, Projected Monthly Payment and Sufficient Annual Income Necessary

Know How Much Your Are Borrowing & How Much You Will Earn

Knowing how much debt you are accumulating as a student and your ability to repay is very important to understanding loan debt and helping to assure that your goals remain in reach. A national study of 1,012 college students, titled "Big Loans, Bigger Problems," released by the State Public Interest Research Groups found that eight out of 10 college students underestimated how much debt they are taking on to pay for higher education, despite the fact that students are deeper in debt every year.

Seventy-eight percent of students underestimated the cost of their loans by an average of $4,846. The study went on to say that freshmen, sophomores and lower income students were more likely to underestimate their debt and fall into a trap of growing financial burden. Students also often forgot to factor in interest when estimating how much they will owe. This leads to debt coming as a surprise.

The study also found that students also tended to overestimate what their income would be after graduation. Students said they expected to make an average of $39,016, while the average income for recent college graduates is $27,000 according to the study.

The average debt of graduating seniors with federal loans jumped 36 percent in the last four years to just under $12,000. The number of students graduating with more than $20,000 in debt nearly doubled in a recent three-year period, according to the General Accounting Office.

Understanding student loan debt is paramount to students successfully pursuing their goals.

Calculate How Much You Can Afford to Repay

If you manage your money carefully while you're in school, you'll be better prepared for the challenges you will face after graduation.

EDWISE™,the online financial planning guide at (www.edwise.org), can help you take much of the guesswork out of managing money. By plugging in projected loan amounts, estimated expenses and earnings for a future career, students can estimate how much they can afford to repay. EDWISE™ also offers a clear, concise planning information to help students calculate efficient ways to manage their finances, along with a printout of your financial plan.

Tools For Debt Management 
Information, communication and organization of your loan records are the three most important tools in debt management.

Information
As a student borrower you will receive several important documents with each loan. The loan application generally includes a student copy for your records. If it does not, you should make a copy. The loan application usually has an information section attached. A promissory note is incorporated into the application for some loans and is a separate document for others. The amount and terms of each loan are spelled out on the disclosure statement, which you will receive shortly before receiving your loan check. It is important that you read and understand all provisions for each of these documents and keep your copies for future reference. Shortly before you begin repayment, your lender will send you a repayment schedule explaining the exact number and amount of monthly payments required to fulfill your obligation.

These documents will provide you with the important information necessary for establishing and organizing your loan portfolio. To develop a comprehensive strategy for student loan repayment, you will need to know how much you owe upon graduation and when you complete any deferment periods. You will also need to know your repayment options as well as your approximate monthly payments. See the Education Resource Center section Financial Planning & Debt Management - Loan Repayment Options.

Communication
Maintaining communication with your lenders is your responsibility. Try to find a contact person at each lender and deal with that person whenever possible. You need to contact your lender when you graduate or leave school, begin and complete an authorized deferral period, and change name or address. If you find yourself in any situation which prevents you from fully meeting your repayment obligations according to your repayment schedule, you should contact your lender immediately to discuss your situation.

Some of your loans may be sold to another lender (secondary market). You will be notified in writing when this occurs. Make sure that you keep a record of these transactions and try to establish a relationship with these secondary lenders. Keep all correspondence and notes regarding telephone call in your loan files.

Your repayment record on your student loans will become a part of your credit history. A good record will contribute to building a positive credit history and will enhance your eligibility to borrow for some forms of financial aid, and major purchases and investments once you have begun your career. A record which includes delinquency and default will have the opposite effect.

Delinquency is the failure of the borrower to make the required payments when due, or to meet other terms of the promissory note and Default - a delinquency where it is reasonable to conclude the borrower does not intend to honor the loan repayment promise can often be avoided by maintaining good lines of communication with your lender. Most lenders will usually work with you to help you avoid problems with your loans.

If you default:

The lender transfers your loan records to the guarantee agency.

The lender notifies a credit bureau that you have failed to repay your educational loan(s) in a satisfactory manner and that it has transferred your educational loan(s) to the guarantee agency for further collection activities. Your credit rating will be damaged. This will impede your ability to obtain credit for other purposes such as purchasing a car, home, or starting a practice; and

You cannot receive any further federal financial assistance for education.

You may be considered in default for any of the following reasons:

Failure to establish or maintain eligibility for the loan, resulting in the loan's being declared disqualified. If a disqualified loan is not paid in full within 30 days, you will be considered in default;

Failure to make your scheduled monthly payments when they are due-when you get behind and the amount past due is as much as 6 regular payments;

Failure to make appropriate arrangements with the lender (s) to pay back each loan by the required date; or

Failure to meet other borrower responsibilities that makes it appear that you do not intend to honor the obligation to repay your loan(s)--this might be a combination of things such as failure to make a payment when due and failure to inform the lender of name and address changes.

The collection effort does not stop after you default and the lender transfer your loan (s) to the guarantee agency. For example:

• Collection efforts continue and you may be charged reasonable attorney’s fees and other costs and charges necessary to collect the debt;
• Judgments are filed against you and your property; 
• Legal action through the State Attorney General's office or through other appropriate agencies; 
• Federal or state income tax refunds may be seized as a "setoff" against your educational loan debt; 
• Most schools will not send academic transcripts, or any other information about a graduate if a loan is in default; 
• In some states the defaulter’s wages may be garnished; and 
• If you work for either a state or federal government, your employer will be notified.

Legislation in many states precludes declaring bankruptcy for at least five years after repayment begins, and some courts are refusing to cancel repayment responsibilities.

Organization Of Loan Records
It is impossible to manage a loan portfolio if you don't have critical information about its characteristic, such as the amount borrowed, interest rates, and the addresses of lenders. In fact, data indicate the chances of defaulting are less if you have certain basic information about what you have borrowed. 

An unspecific awareness of what you have borrowed probably creates more anxiety than having this information, because the unknown is always more frightening than the reality. Aside from making you feel anxious, being unaware creates more real problems because you don't have enough information to take action when it is necessary.

The longer you wait to begin collecting these data, the more difficult and time-consuming it will be for you. In addition, the chances of error greatly increase the longer you put off organizing your loan files.

See the Education Resource Center section on Financial Planning and Debt Management - Keeping Excellent Records for a detailed discussion and a step-by-step exercise on how to collect and organize your loan records