As the amount of student debt creeps closer to the trillion-dollar threshold, it has far surpassed any other type of debt in the country. Students have become the largest consumers of credit, owing more money for their education than people owe for credit card bills and mortgages. For many, taking on this debt is a decision made while still a senior in high school.
The conversation surrounding student debt involves EFCs, FAFSAs and a whole host of other unruly acronyms whose full forms often hold less meaning than their shortened ones. And yet, as students and their families toil over the forms and documents with often incomprehensible language, they will be the ones to feel the acute effects of the financial decisions they make now years down the road.
This is why we’ve sat down to sketch out some explanations for those acronyms, and illuminate just how many people at Virginia Tech have muddled through this information already on their own.
How prevalent are loans at Tech? How much do my peers owe?
According to the university’s financial aid office, just under half — about 47 percent — of undergraduate students borrowed money through one type of loan or another for the 2009-10 academic year.
That means that while sitting in class either the person to your left or right will owe money to someone when they graduate. That’s every other person you pass while walking across the Drillfield.
And while some of these students may owe smaller amounts, it is likely that the guy sitting next to you will be paying more than mere chump change. The average cumulative debt for the class of 2010 was $23,100.
That means a student in that 47 percent taking out loans will owe, on average, about four 50-yard-line Super Bowl tickets worth of money before they sit in Lane Stadium and receive their degree.
And the way national trends and tuition hikes are headed, those numbers aren’t likely to get smaller any time soon.
What are the different types of loans?
All loans lend out money, which you then have to pay back with interest, like a charge for service.
But the terms of that agreement can vary greatly. Just as car commercials list “APR financing” this and “zero percent down” that, how much interest you have to pay and the amount of time until you start paying it is different from loan to loan.
For students, the most important differentiating factor is usually who you’re borrowing money from. The government lends out money to students through something called a federal Stafford loan, which can be subsidized or unsubsidized.
A subsidized Stafford loan has a low fixed interest rate, meaning the interest won’t change even if the market changes, and the government pays that interest for you up until six months after you graduate. To qualify for a subsidized loan, you have to demonstrate a certain amount of need.
Unsubsidized loans have a similarly low rate but accrue interest while you’re in school that you are responsible for paying, even if it’s after graduation. Generally, all federal loans have lower interest rates and longer post-graduate grace periods than loans from private companies.
How does one demonstrate need?
This is where the FAFSA, or Free Application for Federal Student Aid, comes in.
Filling out the FAFSA means providing the government with a whole slew of information about you, your family, your income, how many siblings you have and anything else pertinent to your financial situation.
The result of the FAFSA is a number called the Expected Family Contribution. This number represents what the government thinks you and your family are capable of paying for your education.
To calculate “need,” your EFC is subtracted from Tech’s total expenses — tuition, room and board, books, etc. If the EFC is less than the total expenses, then the difference is your demonstrated need.
What does an aid package then look like?
An aid package, depending on your demonstrated need, can be any combination of state and federal grants — meaning money that doesn’t need to be paid back — subsidized or unsubsidized loans, or money from working with the school.
At Tech, 46 percent of first-time freshmen receive some sort of aid from the school. That package may provide enough money for the student to go to school, or it may not.
It’s up to a student and their family to decide whether to accept this aid package, to try to find other funding sources such as scholarships, or, if it’s still not enough, to consider taking out private loans to fund the rest if it’s still not enough.
What kind of information do high school seniors get about this?
Shelley Blumenthal, a guidance counselor at Blacksburg High School, said they do their best to ensure that each student has a real understanding of their financial aid package.
Through a combination of workshops, presentations and literature on the topic, they help to guide students in their research.
“We encourage students who have questions to bring their financial aid package in to us,” Blumenthal said. “I think they need to be aware of the results of taking on significant debt.”
For Blumenthal, the decision of whether to take on debt is a tough question — one he doesn’t necessarily have the answer to. He says his job isn’t to be judgmental of individual decisions, but rather make sure they have all the necessary information.
However, Blumenthal said “taking on a significant amount of debt would concern me, not just for my own family but for my students.
“I would be hesitant. But I do think there are extenuating circumstances.”
What can I expect when it comes to paying my loans back?
This is highly dependant on whether your loans are private or federal.
First, let’s deal with private loans — a slightly scarier picture. Because many private loans don’t have fixed interest rates, debt can accumulate more quickly, and there is less flexibility to renegotiate the terms of these loans.
Private student loan debt is more like credit card debt, except with the big catch that you can’t get out of it by declaring bankruptcy.
Federal loans provide more options. You can choose from several repayment plans that give you flexibility — in terms of both the length of time you will be paying and how much your monthly payment will be.
They allow you to tailor payments to what you can afford based on your, hopefully, new income.
Additionally, certain forms of service, like the Peace Corps or National Guard, can make you eligible for loan forgiveness. A list of such options can be found online at the Federal Student Aid website.
Finally, multiple federal loans can be easily consolidated into one monthly bill for easier payment and a potential interest rate reduction if you qualify.
Whether private or federal, and regardless of the terms, negotiating payments that you can make monthly is important for maintaining good credit — so you can qualify for a loan when you want to buy a new car or house.