Zina Kumok’s Guide to Smart Student-loan Liftoff

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In her latest column, personal-finance blogger Zina Kumok, a monthly KWHS contributor, revisits one of her favorite subjects: student loans. Kumok, 26, graduated from Indiana University a few years back saddled with $28,000 in student-loan debt, $350 in minimum monthly payments and a $28,000 annual journalism salary. She was struggling financially. In December 2012, Kumok decided to do something about her debt. She launched an online blog, “Debt Free After Three,” on which she regularly posted personal-finance reflections and anecdotes about her journey to pay off her sizable student-loan debt in only three years. Typically, it would take nine years or longer, and cost thousands of more dollars in accrued interest. On November 18, 2014, Kumok was victorious. Her last loan payment cleared, and she was debt-free in even less than three years. How did she do it? Check out this KWHS article for insight. Meanwhile, here are some of her tips to help you navigate your student-loan journey.

Taking out student loans for your college education is one of the most important decisions you’ll ever make. So why not make an informed one? The power is in your hands. I didn’t know anything about student loans before I went down this long and winding path. I took out the loans as an 18-year-old in order to supplement the $15,000 a year that my parents agreed to pay for my tuition. Ultimately, I was $28,000 in debt with limited resources to do anything about it. I wish someone had explained to me what my monthly payments would be and what that even meant, the repayment options available to me, or what I would do if I couldn’t afford to pay my loans back.

So, here’s a great place to start. If you understand the following information, then you will be well on your way to successful student-loan liftoff.

1. Fill Out the FAFSA with Mom, Dad or your guardian.

The FAFSA (Free Application for Federal Student Aid) determines what, if any, student loans you qualify for. Without this piece of information, you could be missing out on lots of federal student loan benefits. Once you receive your loan information, check to see what the key terms are:

  • Subsidized or Unsubsidized? A subsidized loan means that interest on the loan will not start accruing until after you graduate. You can only qualify for subsidized loans if you can demonstrate financial need. Unsubsidized loans are not based on financial need. I only qualified for unsubsidized loans.
  • Parent PLUS Loans. Your parents can also take out loans for you to pay for tuition. Many parents take these out with the intention that the student will pay for them after graduation. Make sure you’re aware if you or your parents make this kind of arrangement.
  • Perkins Loans. These loans are only available to students who can demonstrate financial need. Your school may or may not offer this loan to you.
  • Federal or Private? Most people prefer to take out federal student loans because they offer a variety of repayment options. If you do have to take out loans, it might be best to go for federal instead of private loans. Federal loans offer more protection and better repayment plans than private loans. For example, federal loans offer public-service forgiveness programs, which can erase part of your loan if you choose to serve in the public sector for 10 years. They also offer repayment plans based on your income and can be deferred if you’re having trouble making payments.

2. Go after the free money first.

After you’ve reviewed your loan eligibility, explore scholarship opportunities. Scholarships and grants offer you money for tuition that you don’t have to repay. It’s better to use those to supplement whatever you and your parents can’t afford. One of my biggest regrets is not applying for more scholarships. When you’re in high school, student loans can seem like play money. But trust me, $1,000 to a recent college graduate is like a million bucks. Even if it’s a small scholarship, send in an application. Every dollar helps.

You should also consider the living expenses of whatever college you choose when you are preparing financially for life after high school graduation. A friend of mine took out $20,000 in loans just for living expenses when she lived in Los Angeles for one year of law school. Multiply that by four (plus any loans for tuition) and you’re close to six figures in debt and most likely a lifetime of interest-charged repayment.

3. Embrace your interest rate.

You should always make sure that you’re aware of your interest. There’s a big difference between taking out $20,000 and paying an interest rate of 3.4% on the loan and taking out the same amount with an interest rate of 6.8% (like I did). Read this article I wrote for KWHS to get all the dirty details on interest.

Be wary of taking out a private loan with a variable interest rate. That means that the amount of interest you are paying could change at any time. If you’ve taken out tens of thousands of dollars in loans, a change from even 2.99% interest to 3.99% would mean paying hundreds more dollars in interest over the lifetime of the loan.

Look at your loan repayment terms carefully. Most federal loans have a term of 10 years; you can easily find online calculators that will show you what your monthly payments will be when you start to pay off your debt.

4. Research your career’s starting salary.

A general rule of thumb is that you shouldn’t take out more in loans than the average starting salary for the career you hope to have. That’s what I did — I took out $28,000 for a degree in journalism, while the median salary for that career in 2010 (a year before I graduated) was $30,000. Even then, my minimum payment on my student loan was 20% of my take-home pay, leaving little room for fun money.

There’s no guarantee that you’ll get a job in your desired field, so be conservative when you estimate your ability to pay back your loans. See if you can choose a lower-cost school that still offers your major or research if you can get your degree in less time. College may be the best time of your life, but paying back your loans won’t be. Even though I followed the guideline of not taking out more than I earned, I still found it difficult to shop, save and pay back my loans. You don’t want to spend your post-grad life worrying constantly about debt.

5. Remember, loans can last a lifetime.

It is nearly impossible to get student loans discharged in bankruptcy. For most high school students, how much you take out to pay for college will determine your finances for the rest of your lives.

Many people who take out too much in loans have to give up their dreams in order to get a better-paying job. I wanted to teach English abroad after graduation, but I was worried I wouldn’t be able to afford living in a different country and paying back my loans.

Now that I’m debt-free, I have much more freedom to do what I want. But it took me three years and lots of sacrifices to get here. If you want to move to a high-priced city like New York to pursue a theater career, having student loans will make it harder to realize your dreams. Trust me, you need to know what you’re getting into before you sign on the dotted student-loan line.

Related Links

Conversation Starters

Zina Kumok offers a starter kit of student-loan information above. Now, take it one step further. Check out this US News & World Report article on 10 questions to ask your loan servicer. Can you think of any questions to add to this list?

Why was Zina so eager to pay off her student-loan debt early? What motivated her? Read the linked article in the italicized intro about how she did it and discuss some of her strategies.

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