Before we start

There are four absolute rules, regarding your student loan (and borrowing in general), to keep in mind:

1. Pay your bills, in full, and on time. If you cannot, the best course of action is to contact your loan provider and explain your situation. They might be able to come up with a workable solution for both of you. Ignoring your financial obligations is never a good idea.

2. The less you borrow in the first place, the less will compound, and the less you will ultimately have to pay back.

If you borrow $25,000, for 10 years, at 6%, you will have to pay $278 a month, and end up paying $8,306 in interest for a total of $33,306.

A $30,000 loan will cost you $333 a month. Your interest amount will be $9,967, and your total will be $39,967.

A $40,000 loan will cost you $444 a month. Your interest amount will be $13,290, and your total will be $53,290.

3. If you make extra payments towards your principal, you will lower the amount you will have to pay back, and you shorten the length of the loan.

If you borrow $30,000 at 6% for 10 years, your monthly payments will be $333, and you will end up paying a total of $39,967.

Add $100 a month to the payment, and you will shorten your loan by 34 months and end up paying a total of $36,921.

Add $200 a month to the payment, and you will shorten your loan by 53 months and end up paying a total of $35,317.

Add an extra $1,000 every year, you will shorten your loan by 28

months and your total is $37,543.

These calculations were made using the Student Loan Calculator at: http://www.bankrate.com/calculators/college-planning/loan-calculator.aspx?MSA=&MSA=

*Do make sure your additional payments are applied to your loan principal.

4. You should consider your student loan an investment. Ideally, it is meant to provide you with an education which should lead to a well-paying job.

The National Center for Education Statistics reports:

“Among first-time, full-time undergraduate students who began seeking a bachelor’s degree at a 4-year degree-granting institution in fall 2006, the 6-year graduation rate was 57 percent at public institutions…”

That means that up to 43% of students, which start college, will not have earned a degree after six years, and they may have incurred significant student loan obligations for no big career payoff.

If you think that your desired degree will not further your current circumstances, or if you will not be able to finish your degree, now may be the time to take a look at your own situation and cut your losses.

Gather your information

In order to correctly make good decisions about your student loan(s), you need the following information:

a. Current loan balances and current payoff schedules

b. Loan balances and payoff schedules upon graduation.

If you do not have this information on hand, contact your loan provider(s) and request this documentation for each loan.

Okay, let’s go.

There are five basic steps to making wise decisions regarding your current/future student loans:

Step 1

Determine where you stand with your loans right now (How much you do you owe? How much would you have to you would have to pay right now in order to pay off your loans?).

Step 2

Determine how much you will owe if you complete your degree.

Step 3

Determine your job prospects/earnings right now and upon completing your degree.

Step 4

Determine your expenses.

Step 5

Put it all together. Determine if it is worth the extra time and money to finish your degree given your job expectations/realities.

Now, let’s start with Step 1: (Please Note: all of the following spreadsheets are ballpark estimates and should not be relied on without doing your own calculations.)

Step 1

Determine where you stand with your loans right now (How much you do you owe? How much would you have to you would have to pay right now in order to pay off your loans?)

Write up your own spreadsheet following this example.

In this example, we are assuming we are at the end of two years of school. We have written down the loans taken out so far, the duration of the loan payoff in years, the amount of the original loan, the amount of the loan right now, and how much it would cost to pay off the amount of the loan that we owe now (which should be available by asking your loan provider).

Loans Loan Amount of Loan Amount Immediate

Taken Term Original % of Loan Pay-off

Out in Years Loan $ Now $ Schedule $

Year 1

Loan A 10 12,000 4.66 13,144 137

Loan B 10 4,200 8.00 4,899 59

Loan C 15 8,000 8.00 9,331 89

Year 2

Loan D 10 12,000 4.66 12,559 131

Loan E 10 4,000 8.00 4,536 55

Loan F 15 8,000 8.00 8,640 83

Total $53,109 554

$554 X 12 = Yearly Payment $6,648

Assumptions:

Loans A and D: These are unsubsidized Stafford Loans—if it is un- subsidized—interest rate would be 0%–and “Amount of Loan Now” would be $12,000 each. Interest is compounded on a yearly basis. The interest on many loans accrues on a monthly basis.

Our conclusion:

In this example, if we were to quit school right now, we would owe $554 a month, which is $6,648 each year.

Step 2

Determine where you will stand with your loans if you complete your degree.

Complete the following:

Cost to complete your education $_____

Less: Income earned to

offset education costs _____

= Loans required to complete

your education $_____

In this spreadsheet we have updated the amounts owed from Years 1 and 2 and added loans we have taken out in Years 3 and 4.

Loans Loan Amount of Loan Amount Immediate

Taken Term Original % of Loan Pay-off

Out in Years Loan $ Now $ Schedule $

Year 1

Loan A 10 12,000 4.66 13,144 137

Loan B 10 4,200 8.00 4,899 59

Loan C 15 8,000 8.00 9,331 89

Year 2

Loan D 10 12,000 4.66 12,559 131

Loan E 10 4,000 8.00 4,536 55

Loan F 15 8,000 8.00 8,640 83

Year 3

Loan G 10 12,000 4.66 13,144 137

Loan H 15 4,200 8.00 4,899 47

Year 4

Loan I 10 12,000 4.66 12,559 131

Loan J 15 4,200 8.00 4,536 43

Total $95,260 985

$985 X 12 = Yearly Payment $11,820

Assumption:

Loans A and D: These are unsubsidized Stafford Loans—if they are subsidized—interest rate would be 0%–and amounts owed would be $12,000 each. Interest is compounded on a yearly basis. The interest on many loans accrues on a monthly basis.

Conclusion:

If we were to finish the degree in four years, we would owe $95,260, and have to pay $985 a month, which is $11,820 each year.

Now, fill out your own spreadsheet.

If you anticipate going beyond four years to complete your degree, you will need to add those years to your debt spreadsheet.

Step 3

Determine your job prospects/earnings right now, and if you complete your education.

Will an extra two years (or more) do you any good? Let’s find out.

An example

a. If I quit school right now, I can work as a waitress, I will make about $20,880 a year.

*(I can obtain salary information from inquiring around my community and/or using the Department of Labor Government Statistics website at http://www.dol.gov/dol/topic/statistics/wagesearnings.htm)

b. Or, if I finish my degree, I will be working as an accountant, and I will make $37,250 a year.

Complete the form.

What are *your* prospects?

If you were to quit school right now, your job or career would be ________________, and your yearly income would be $____________.

If you were to wait until you graduate, your job or career would be _____________, and your yearly income would be $____________.

Use this information in Step 5.

Step 4

Determine your expenses.

One of the most important aspects of any successful future is coming up with a budget. Estimating your expenses is a crucial step in making good decisions.

Here is an example of an intelligent attempt at looking at the future. (You can never be exact, but don’t give up because of that.)

Yearly Expenses: Now Upon Graduation

Cost of Loans $6,648 $11,820

Rent 7,200 7,200

Food 4,800 4,800

Car Payment 5,000 5,000

Clothes 2,400 2,400

Phone 1,200 1,200

Internet 800 800

Cable 0 0

Car Insurance 700 700

Renter’s Insurance 400 400

Health Insurance 2,400 2,400

Savings/Investment

Commitment 3,000 3,000

Total Yearly Exp. $34,548 $39,720

Notice that we obtained the cost of loans from Steps 1 and 2 and goes up from $6,648 to $11,820 after two more years of school.

Now, complete your own list of expenses, and total them up, for “right now” and “upon graduation.”

Step 5

Put it all together–your job/career and yearly income information from Step 3 and your expense information from Step 4. Determine if it is worth the extra time and money to finish your degree given your job expectations/realities.

For example: Right Now Upon Graduation

Job/Career Waitress Waitress Accountant

Yearly Median Income $20,880 $20,880 $37,250

Yearly Expenses:

Taxes–ballpark $3,132 $3,132 $7,450

Cost of Loans 6,648 11,820 11,820

Rent 7,200 7,200 7,200

Food 4,800 4,800 4,800

Car Payment 5,000 5,000 5,000

Clothes 2,400 2,400 2,400

Phone 1,200 1,200 1,200

Internet 800 800 800

Cable 0 0 0

Car Insurance 700 700 700

Renter’s Insurance 400 400 400

Health Insurance 2,400 2,400 2,400

Savings/Investment

Commitment 3,000 3,000 3,000

Total Yearly Expenses $34,548 $39,720 $39,720

Surplus/(Deficit) ($16,800) ($21,972) ($9,920)

Is it worth it?

After completing your own spreadsheet, you are in a better position to make good financial decisions.

Conclusion

In our example, with the expectation of a waitress, counter person, or other job which does not require a college degree, we are already in the hole for about $17,000 after two years. If we continue on in school, take on more loans, and still work as a waitress upon graduation, we could get behind as much as $22,000 a year. This is not great news, but at least we might decide, after two years, not to go further into debt.

Even, if we do get a job as an accountant, we are looking at an approximate $10,000 deficit a year. The obvious expense to cut is our “Savings/Investment Commitment” of $3,000. Do remember that if you do this, you are robbing your own future.

None of the three examples look very good; however, it is better to know ahead what you might be facing.

No two ways about it—

If you run a deficit, you must either increase your income or decrease your expenses. And don’t wait until you graduate—you can start taking proactive action right now.

Increase your income—

Change your degree to get a job which pays more

Take on extra work

Decrease your expenses—

Change to a cheaper college

Move in with your parents during college and/or when you graduate, or

Move in with numerous roommates

Use public transportation

Go off or lower a phone or internet plan

Don’t dine out

Seek out sources of loan forgiveness, loan deferral, or income based loan

repayment plans (although this only prolongs the loan misery)

Mitigate your loan impact—

Start making payments toward your student loan principal right now

The inevitable conclusion

The sooner you can pay off your student loans, the sooner you can get on with your future.