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The Truth About Student Loans

Nothing is free, and nothing worth having is easily gotten. It’s a tough lesson to learn for new college graduates — especially those with big student loan debt. “Welcome to the real world, now here’s your tab. Pay up.”

The pressure is on to quickly find a job and start paying back lenders. Many grads will develop a newfound interest in finance as the reality of the situation finally catches up. They’ve spent several years signing their name and attending class, now they have to go back and look at what they were signing. Around this same time, many will find support systems built into their loans, particularly federal loans.

The government was nice enough to work forbearances, deferments, and reduced payments plans into their offerings, but they all come with a hefty price tag if abused. Many students jump at the opportunity to reduce or suspend payments without understanding the consequence. It’s more than “kicking the can down the road”; it’s “kicking the snowball down the hill”. As the snowball keeps rolling, it picks up speed and gets bigger and bigger — that snowball is debt.

What many students don’t realize in these situations is how interest works into their obligation. Suspending payment on an unsubsidized loan temporarily stops the payment, but it doesn’t stop the interest from growing. When you do nothing, the interest, and overall amount of repayment, just keeps getting bigger. Many assume that the balance of the loan will remain the same and can be paid off later, but the balance continues to grow.

The same goes for the reduced payment option. This can be even more dangerous because it gives the borrower the impression that they’re making progress. In reality, they are often making payments on the compounding interest, never touching the principal balance. A borrower can make reduced payments in this manner for the rest of his or her life and still never pay off the balance.

It can be difficult, but the goal is to make a plan of attack and address the student loan head on. That’s going to probably mean spending evenings at home instead of going out, putting off big purchases like a new car, computer, or TV, and not going on vacation. The good news is that it pays off. Eventually when your career kicks into gear and you’ve paid down your debt, it’ll feel like being shot out of a cannon. Until then, keep your head down, stay focused, and pay down the debt.