With news from Washington, we always hear about the hot buttons and often not about the details that really affect our lives. But as in annual reports, most of the meat is hidden in the footnotes. The new 11th hour debt ceiling deal has some big surprises in it for student borrowers.
In case you missed the fine print, here’s the change. For graduate students, Stafford loan interest will no longer be waived while the student is in graduate school. Formerly, these loans did not charge interest on the principal until six months after the student graduated. As we all know, for graduate students that can take a verrrryyyy long time. Now, interest will accrue while the student is in school, and be added to payments when repayment begins. It can be thousands extra in costs for students who borrow the max. How much is this “tiny” change worth? Well, the estimate is that it will total $21.6 billion over the next two years, with the savings to be applied to maintain Pell Grants. These changes will go into effect on July 1, 2012.
Also gone is the credit for students who make on-time loan payments for 12 months. Now, all you get is a thank you—okay, probably not that either.
This change makes it even less desirable to have loans, and I still recommend borrowing as little as possible and certainly no more than what the student can expect to make in the first year out of school. The reason for this rule of thumb is that if the student is repaying with 10% of income (a reasonable figure) it will take 10 years to pay it off. As the student’s income increases, there’s some chance that a loan can be paid off early.
While I strongly believe that undergrad education should be all about acquiring a broad base of knowledge, students should keep a closer eye on career choices if they’re borrowing significantly. You don’t want $80,000 in loans as a speech or film major. However, as much as I believe in a liberal education as an undergrad, graduate school is all about specializing and it IS job training. Don’t enter that PhD program in English unless you’ve really thought through and researched what the career paths might be.
For many graduate level programs, not being offered scholarships is a pretty good indication of how much (or little) they’re really interested in you. It’s a good idea to think about WHY you’re not getting any offers. For professional school programs, less money is not necessarily an indication of how desirable you are, but employment in these fields is not the slam dunk it once was—ask any recent law graduate.
As in any financial planning issue, don’t borrow money for any investment unless you have investigated and thoroughly understand the risks involved. Start young understanding this and you’ll save yourself a lot of flimflam, whether from graduate school admissions offices or “venture capitalists” with yet another hot idea for your hard earned dollars.