Student Loans: Expectation vs. Reality

Stephanie Olsen
May 4, 2021

Student loans are the only way many students can afford to go to college. If you have student loan debt, you’ve got lots of company. According to The Institute for College Access & Success, two in three college seniors owe an average of nearly $30,000 in student loans.   It’s really important to know how to best finance your college education. A mix of savings, scholarships and grants can go a long way to reducing loans you may need to make ends meet.  Working summers and part-time during school is another way many students afford tuition and room and board.   Sometimes, though, student expectations fly in the face of reality. That’s true of college life itself, and of course, student loans.   Take a look.  

College Freshmen: Expectations and Reality

Expectation: I can easily make my student loan last all semester.   Reality: Augh! I won’t even make Thanksgiving! I've turned into a “broke student eating ramen noodles” cliché!   Unless you’ve created a realistic budget, that first loan installment of the year can seem like way more than enough. Unfortunately, splurging on daily Grubhub and UberEats nosh deliveries, with a few trips to Starbucks between meals, adds up in a hurry. Take it easy on fast food, expensive fun and unplanned activities, and you might just squeak by.   Source:
  Expectation: My student loan refund came in! Let’s go shopping!!!   Reality: OMG. What are all these other expenses? How can a stupid textbook cost $200?? And my laptop just died! Plus I still owe my campus spirit fee. What even is that? And where’d all my loan money go?   Do your research before making that budget we mentioned. Tuition is of course your number expense at college, with room and board a close second. Other costs like books, administrative fees, health insurance, transportation, and personal expenses, might seem small one at a time, but they quickly add up. Try to budget for the unexpected, like the cost of replacing a broken laptop. Source:
  Expectation: I KNOW loans aren’t free money! I’ll just apply for a couple of scholarships.   Reality: OMG loans have interest! They’re really expensive! I’m totally applying to 40 scholarships this month!   Student loans really aren’t free money. Interest on student loans ranges between 6% and 8.5%, although federal loans for the 2020-2021 academic year should see rates as low as 2%. Even with a 2% interest rate, your $30,000 student loan debt paid over 10 years at $276 monthly, would cost you a total of $33,125.   Truly free money that you don’t have to pay back are grants. Grants can be need-based, like the Pell Grant, or merit-based, like the Academic Competitiveness and National SMART Grants. Look for and apply to as many grants as you possibly can.  
  Expectation: Just the loan's interest rates and fees will totally kill me.   Reality: Actually, interest rates and fees for federal student loans are usually lower than private student loans. Loans for undergraduate students first disbursed after July 1, 2020 have a fixed interest rate of 2.75% – and that’s for the life of the loan.   And fees on federal loans are a small percentage of the total loan amount. For direct subsidized and unsubsidized loans, that percentage is 1.059% for disbursements made between October 1, 2019 and October 1, 2020.  
  Expectation: I'm a complete newbie at banks and lenders. How can I get a private loan with terms that are actually in my favor?   Reality: If you don’t have enough money for college, private student loans can fill the gap. Private lenders need your business, and will go the extra mile for you to get it. They’ll reward you for your good credit rating, for example, with reduced interest rates. And if you don’t have a credit history yet, they’ll accept a cosigner who does. Private lenders also tend to have higher borrowing limits than federal loans, which can be helpful if your tuition and expenses are more than expected.  

Recent College Grads: Expectations and Reality

Expectation: Everybody has student loans!   Reality: Not really. Remember those kids you laughed at for taking shop class? They got a trade and make way more than you.   Lesson learned. Be nice. And if you need to reduce your monthly payments, check out the income-driven repayment plans at Federal Student Aid. Under the income-based repayment plan, you’ll make monthly payments equal to 15% of your discretionary income (divided by 12). Discretionary income is how much you have leftover after paying for rent, food, taxes, and other essential living expenses.   And see if your job qualifies you for loan forgiveness. For example, government and non-for-profit employees can receive loan forgiveness under the Public Service Loan Forgiveness Program. And teachers can have up to $17,500 of some loans forgiven too.  
  Expectation: I can afford a student loan payment, an apartment, and a car payment, and drinks with friends….   Reality: OMG, I can’t afford anything on this miserable salary!   Don’t expect to be earning the really big bucks right out of college. If you’re making $50,000 in your first job, you’re actually doing okay. That's the average for starting salaries for college graduates according to the National Association of Colleges and Employers. Computer science grads make the most, starting at $71,000, with engineers coming in at $67,000 and math and stats majors just over $60,000. Social sciences graduates come in lowest at $47,000.  
Expectation: I know exactly what an interest rate is, and I got a good one on my student loan!   Reality: WTF I’m paying back $6,000 more than I borrowed??   Remember that example above with the 2% interest rate? That showed that your original $30,000 student loan will cost you $3,125 in interest. So it’s easy to see that a larger loan debt or higher interest rate will add to that amount. And if you have to reduce the size of your monthly payments or extend the term of your loan, you’ll increase the final tally by even more.  
  Expectation: No problem. I’ll make every monthly payment, and pay it off my student loan in no time!   Reality: I made payments for 5 years on my student loans. Almost all of it went to interest and almost none to the principal. My friend paid extra every year, and was able to pay it off completely in less than 5 years.   Let’s use that $30,000 loan at 2%. If you reduce the term loan from 10 years to 5, which would nearly double your monthly payments (from $276 to $526), you’d not only pay it off in half the time, but also pay $1,550 in interest instead of $3,125.    Many recent graduates who are working their first jobs continue to live like college students in order to be able to put extra money against their loans. They live at home or have roommates to save on rent and have weekend side hustles to bring in more money.   Source:
  Expectation: I’ve got plenty of time to start paying off my loans!   Reality: Time flies and interest accrues.   Your federal student loan must start to be repaid once you graduate (or if you drop below half-time enrollment or leave school). With some loans (like a Direct Subsidized or Direct Unsubsidized or a Federal Family Education Loan), you have a six-month grace period. but if you’ve got a PLUS loan, you have to start repaying it as soon as you get it!   It's not all doom and gloom. Keep at it. You’ll pay off your student loans one day.   And when you do, you’ll dance like Caitlin Boston, who paid off $222,817 in undergraduate and graduate school loans. It took her 10 years and included more than $75,000 in interest, but she did it by herself, and without help. She gives some very good advice at the end of the video, so watch the whole thing.