Make student loans work for you

Financially Inclined November 10th, 2023 Transcript

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Carmen Perez: I got sued for my student loan of $30,000. And this doesn’t happen to everyone. But essentially, I was defaulted while I was a full time student in school and kind of ignored all of the notices that I was getting. I thought it was a clerical error. Got knock on the door, got a piece of paper that said Queens County Court summons. And that essentially is the start of a lawsuit. You have to answer to a complaint. And basically, the student loan provider was suing me for my student loan. And that is how my journey in money began.

Yanely Espinal: What’s up, everybody? I’m Yanely Espinal and welcome to Financial Inclined from Marketplace. We’re sharing money lessons for a living life your own way. I am so excited to have my good friend Carmen Perez sharing her story about student loan debt because it’s definitely a unique story. Now, to be clear, getting sued by your student loan provider is not something that’s very common. So there’s no need for you to be stressing out about this. In Carmen’s case, she actually got a lawyer and they sorted the whole thing out. She even ended up paying back all of her student loans. So she’s good. Her story ended up going viral and was featured all over the place on Business Insider, Good Morning America, Afro tech and a lot of other platforms, too. So Carmen’s experience makes her uniquely qualified to give us the full scoop on student loans, and that way we can learn from some of her mistakes. Because let’s be real, most of us have taken out student loans or will have to take out student loans in order to pay for college. And there is no shame in that. So let’s get into it. Now that you have had that experience, where are you on whether young people should get them or not?

Carmen Perez: Yes, I think it’s totally okay to take out student loans when you need them and to use them effectively, so only take out the amount that you actually need.

Yanely Espinal: Yeah, that makes sense. When you’re starting to think about student loans as a student it’s usually for the first time. And so I think it’s important just if you’re thinking about student loans to start understanding some of the terminology, the vocab that comes with student loans, because I think it can sometimes feel like a foreign language. What are some of the top key vocabulary words that you feel like students should know when they’re entering into this exploration of student loans?

Carmen Perez: Definitely go to student aid dot gov. That’s where you’re going to find a bulk of the information, resources, calculators, definitions and so on and so forth. Everything that you need in order to get started on your student loan journey. Go there at some of the most important terms to kind of start conceptualizing or wrap your mind around, especially if you are high school, junior or senior is FAFSA. You are going to hear that nonstop. And I think of that as like the car on the highway that’s going to get you to where you need to go. And essentially, FAFSA stands for Free Application for Federal Student Aid, and that is where you are going to go for your grants, work work study program and ultimately loans and how much money you can actually get. So you go in there, you fill that out. It’s paperwork that’s going to require things like tax information. You if you have a guardian or parent, that’s going to be important that they’re close by because they’re going to need income information, so on and so forth. And essentially, when you submit that application, they took take a look at all those inputs, all the things that you put in, the income, your parent’s income, so on and so forth, they take that and put together a package for you based on the school that you’re trying to go to. And within that package you’ll get things like see if you qualify for grants, work study, so on and so forth. So that leads me to the next big term that you might hear is the Pell Grant. And this is a grant that is solely awarded on need based. Ann a grant, unlike a loan, it’s something that you don’t have to pay back if you get this grant. I was a Pell Grant kid myself. It’s just a free extra money that can go towards your education. You don’t need to apply for an outside of the FAFSA things. So they’ll tell you through that application process whether you can get that or have access to that or not. The next couple of terms that you’ll see when you are looking at the application process and FAFSA and looking at that financial aid package that you get are the loans. There’s different types of loans. At a very high level, there are private and federal loans. The federal loans are going to be in that FAFSA portal that you’ll see that your financial aid application and then the private loans are things that you can apply for outside of that application. The big differences between these two is federal loans provide more flexible terms in terms of repayment. They have good payment protections, typically lower interest rates than a private loan. Private loan, You may or may not get a grace period. The interest rate may be pretty high. Depending on who you go with, you have to qualify. So typically you have to have a good credit score and some level of income if you have neither, which probably you don’t because you are 18 or 17 signing up for these loans. Right. You’re going to have to get a cosigner and those qualifications then carry over to cosigner for a decent credit score, income, so on and so forth. And then you’ll see how much you can qualify through that private loans. In the FAFSA portal, you will have access to your federal loans, and within that federal loan, you will see two terms subsidized and unsubsidized. Subsidized loans are given on a need basis to undergraduates. So you’ll see how much you qualify under that subsidized loan. And essentially what that looks like is the government’s paying your interest while you are in school. And then when you start the repayment process for repaying a subsidized will, and that’s when the interest starts accruing and you actually start paying interest. On the flip side of that, that unsubsidized loan is it’s not need based. It’s open to undergraduate and graduate students. There’s no eligibility kind of requirement for that other than you apply through fast, right, to try to get an unsubsidized loan. And then the next thing that you’ll see is ultimately the promissory note. The promissory note is basically all the legal terms, all the all the jargon of what you are signing up for. It is the terms and conditions, the terms in which we are lending you this money and the conditions under which you have to pay this back. Now, the important I want to stress at the beginning I told you that I got sued for my student loan. I did not read my promisary. I just signed it. Oof! I encourage you to take a look. I know it’s painful and it’s tiny print, but it is important that you read through that, especially on a private loan. If you get a private loan before you sign that document, make sure you are reading all of the terms and conditions because it will include things like when you have to start paying the loan back if you have to maintain full time status or you can’t drop. It’ll tell you all of the do’s and don’ts. So it’s important to read the terms and conditions of your promise. And that essentially is basically what you’re signing up for. And it’s saying laying out in plain black and white, this is how much you’re borrowing. These are the terms and what you’re borrowing and under your interest rate, so on and so forth. This is the payback period and all that stuff. So it’s important to pay attention to that.

Yanely Espinal: If I could go back in time and be 17 18, I would take that promissory note to an adult I trust in my school building, like my guidance counselor, one of my teachers, my principal, and just say, can you sit with me to look through this and explain to me, like the key important parts? Because I try to read it and it’s basically like another language to me because there’s so much in there that’s foreign and confusing. I imagine a lot of students probably get confused about what they should do first and what they should prioritize. So what do you what would you recommend to students who are like, okay, there’s a lot you just said, a lot like you just said, like federal and private, then subsidized an unsubsidized. The FAFSA is in there. Like what order should they be doing this in? In order to really be savvy about the process of applying for student loans?

Carmen Perez: Yeah. So kind of the order operations that I like to go by is always go for the free money scholarships and the grants and continuously applying for scholarships while you are in school. My biggest mistake was freshman year I stopped applying for scholarships when I could have had access to that money even the next semester. So continuously think about applying to scholarships. Keep that on your radar. Put a calendar reminder, especially when you go home for break. If you have, you know, spring break, winter break, look for scholarships over that time. Just quickly spend 30 minutes doing it while you’re hanging out with the family. If you need more money, beond the scholarships and grants. Then you look at federal student loans, most importantly, subsidized. But then if you need to going into unsubsidized and then less private loans and private loans only for the reason of, you know, they’re going to be checking your credit and the terms are less favorable should anything happen post-graduation. And when I say anything happens, just think of it like with federal loans, you get a six month grace period to start paying that back. So the grace period means is once you graduate from college, you have six months to basically find a job to be able to pay back these these loans, right? Yeah, private loans. If you go directly to private loans first, you may or may not get that grace period, depending on the terms within the promissory note. So they may say, okay, right after day one of graduation, you start accruing interest and you got to make the first payment within 15 days. So that is making the assumption that you already have a job.

Yanely Espinal: Yeah with what, money?

Carmen Perez: Yeah. Yeah. You’re 22, 20, 21 years old, and you already have the job to be able to start paying. So free money for scholarships, grants, federal student loans. And within that bucket, you want to go for subsidized first, then unsubsidized next. And then last but not least, private loans if you absolutely must.

Yanely Espinal: What about student loan interest rates? Like what can students expect when they’re starting to look at the interest rates that they’re charging student loans. What’s fair, what’s reasonable? What can you know, what can they come to expect?

Carmen Perez: Go on there. Check out the current interest rates. I believe they’re like 4.5 to 5.6. Somewhere around there right now on private loans in the rare instance might be a little lower than the federal rate. But typically those can go all the way up to, I think, 15% interest. Right now, the average student loan is like 36,000, 32,000. Somewhere around there’s between the bands of 30 and $40,000, the average amount of student loans that band right now, the average kind of payment you’re looking at anywhere between 300 and $400 every single month. Do conceptualize that if you are listening to this in your high school student, I encourage you to sit down, create a zero based budget. And what a zero based budget is essentially looking at taking your take home pay, what you expect to make every single month at your job. This is after taxes. Okay? And I’ll walk you through how to kind of get to that. But you’re going to take whatever that number is, put it at the top. It’s been everything on paper. So that looks like you need to spend money on rent, gas, utilities, cable, internet, so on and so forth. And you want to spend everything food, everything you can think of, put it on paper. You spend all of that take home pay until you had zero. And now you know, okay, this is potentially what my budget can look like when I graduate from college.

Yanely Espinal: What is a healthy amount and how do they determine a healthy amount So they’re not borrowing an unhealthy amount and then not being able to keep up with those monthly payments after they graduate?

Carmen Perez: Yeah, So that looks like just a rule of thumb right now is and this is important too, that you need to adjust with what is best for you and your situation. But rule of thumb, just to give you a starting spot, is not taking out more than the average of your first year, the first year of you working. So your starting salary essentially. So let’s say I want to go into I want to be a biologist and you know, I’m going to work at some zoo and as a zookeeper. As a zookeeper, my starting average salary, I know is going to be probably and I’m just throwing this out there, $45,000. Right. That means if you’ve done the research, you know, $45,000 is basically where your do not exceed limit is. That’s going to be your average starting salary. You know, first year most across America. That’s where all the all the zookeepers are getting when they first start zoo keeping is $45,000. So you don’t want to take out more than that for the the entire time that you are in school.

Yanely Espinal: This isn’t something that I think enough people talk about because, yeah, I feel like most people don’t know to do that and to kind of do that research upfront, you know?

Carmen Perez: Yeah, yeah. And it’s it is so important because like you said, you don’t want to be so overleveraged that you can’t, an over leverage, meaning you just you took on more than you can handle, more than your career could actually handle. And it’s just important to kind of stay rooted in the numbers, look at the data, because it’s not it’s not going to lie. It’s it’s very black and white when it comes to those numbers. So if you can stick with that, then all else will kind of fall into place.

Yanely Espinal: Carmen shared so much great info. I especially love what she said about calculating a healthy loan amount to take out. So now here’s my challenge to you this week. Spend some time looking at two or three different career fields that might interest you. Then look for the starting salaries for each. Again, it is completely fine if you’re not exactly sure what career field you want to explore after college. I definitely didn’t know either. But doing this now will help you get a sense for what potential loan amounts might be good for you. Okay. I know you got this, so I’ll see you next time.

Credits:

Yanely Espinal: Financially Inclined is brought to you by Marketplace from American Public Media in collaboration with Next Gen Personal Finance. I’m your host Yanely Espinal. Our senior producers are Hayley Hershman and Zoë Saunders. Our video editor is Francesca Manto and our graphics artist is Mallory Brangan. Our producers are Hannah Harris Green and Hayley Hershman. Gary O’Keefe is our sound engineer. Our intern is H Conley. Bridget Bodnar is the Director of Podcasts. Francesca Levy is the Executive Director. Neil Scarbrough is the VP and General Manager of Marketplace. Our theme music is, by Wonderly.

Hannah Harris Green: Financially Inclined is funded in part by the Sy Syms Foundation, partnering with organizations and people working for a better and more just future since 1985. And special thanks to the Ranzetta Family Charitable Fund and Next Gen Personal Finance for continuing to support Marketplace in its work to make younger audiences smarter about the economy.