Despite the multitude of reasons why a student might elect to take a gap year, the student loan consequences are generally identical for everyone.

In many cases, existing student debt doesn’t majorly impact gap year plans. Nonetheless, planning your gap year with your student loans in mind from the beginning can be greatly beneficial.

The Student Loan Grace Period and a Gap Year

All federal student loans offer a grace period of at least six months, for which students are not required to make payments. This grace period starts after a student leaves school, giving them time before they need to begin repayment. For example, if a student stops attending school in May, the student can typically expect to start making payments in November.

For private student loans, the existence and length of a grace period depend on the loan’s contract terms. Some lenders offer a shorter grace period or no grace period at all. However, in most cases, private student loan lenders align with the federal standard of six months.

This means that in a 12-month gap year, a borrower may only have to make payments for the last six months.

One important note to remember is that borrowers get only one grace period per loan. This can complicate matters for borrowers who return to school and take out additional loans. While most borrowers enter their grace period upon graduation, borrowers who took a gap year might have loans that require immediate repayment.

Another important note is that most loans accrue interest during the grace period.

Interest Will Continue to Accrue*

Borrowers looking to delay or reduce any payments required during a gap year have several options available to them.

Federal loan borrowers can apply for income-driven repayment plans, which means that a borrower’s monthly payments can conceivably be reduced to $0 depending on their income. Private loan borrowers might be able to request additional forbearance or deferment after their grace period ends, further delaying repayment.

Unfortunately, these strategies for reducing or delaying payments come with a significant drawback: the accumulation of student loan interest. Student loans accrue interest daily, increasing the total amount owed.

Taking a year off from school allows the student loan debt to grow exponentially. This is an extra cost to a gap year that borrowers should carefully consider.

However, there is one strategy that many federal loan borrowers can pursue to avoid accruing interest during their gap year.

Avoiding Interest Charges

Federal borrowers now have the option of applying to the SAVE income-driven repayment plan.

Unlike other federal income-driven repayment plans. SAVE offers a generous subsidy that covers 100% of the monthly unpaid interest. For borrowers eligible for $0 monthly payments, SAVE will cover 100% of the interest charges that would typically accrue under other plans. This means that your federal student loan balance will not increase for taking off a year and not making any payments.

It is worth mentioning that the monthly amount you owe under a SAVE repayment plan is calculated based upon your most recent tax return. Thus, if you were a full-time student when you last filed your taxes, it’s very likely you could qualify for $0 monthly payments under SAVE. This is true even if you earn some income during your gap year.

Even for those borrowers who don’t qualify for $0 per month payments on SAVE, the interest subsidy is still available. This calculator will break down your monthly SAVE payment and subsidy.

Borrowing Implications Upon Returning to School

For the most part, borrowing student loans after a gap year works just like it did before the gap year.

However, there are a couple major exceptions that borrowers should understand.

First, those who take a time off from school in order to earn extra money may qualify for less need-based aid when they return to school. This could result in fewer grants and possibly qualifying only for unsubsidized federal loans instead of subsidized loans. This is an important consideration for those thinking about taking a gap year to improve their financial situation.

Second, financial decisions made during a gap year could impact future student loan borrowing. For example, a borrower who accumulates a lot of credit card debt during their gap year travels may find it more difficult to qualify for private student loans upon returning to school. Additionally, missed student loan payments during a gap year can make qualifying for future loans far more challenging.

Avoiding financial mistakes during a gap year is one of the reasons why it is so important for borrowers to stay organized.

Tracking Student Debt During a Gap Year is Essential

If you decide to take a year off from school, dealing with your student loan servicers is something you can’t really avoid. For example, you might need to ask for an additional deferment or request lower payments; regardless, these you’ll probably have to interact with them.

Keeping up with payments and safeguarding your credit score is essential, but there’s more at stake than just that.

One harsh reality that many student loan borrowers discover is that they have no control over the company that owns their debt. Private lenders routinely sell the debt to other companies. Federal loan servicers often change.

When this happens, it can be very difficult for borrowers to know who to pay or how much they owe. Some don’t learn that their debt has been sold until a creditor calls them asking about missed payments. By that point, the credit score damage may already be done.

Given the possibility that your loan could be sold, keeping your contact information up to date with your lenders is crucial.

Updating your details with loan servicers isn’t just helping them. It’s a vital step to protect yourself. If there’s a change in the loan servicer, for example, staying informed ensures you don’t miss important updates or payments.

The Lesson: Plan Ahead

Regardless of the reason a borrower chooses to take a gap year, it is essential to have a solid plan in place for managing student loans during this time.

Borrowers should know when repayment will start, determine which repayment plans are available to them, and figure out how they will be afford the monthly payments.

Neglecting the planning stage could lead to late fees and the unnecessary buildup of interest, making the loan even more expensive in the long run.

The post What Happens to Student Loans During a Gap Year? appeared first on The Student Loan Sherpa.

Unfortunately, there is a prevailing myth that borrowers are irresponsible or trying to exploit the system.

But let’s set the record straight. The truth is far more complex and nuanced than this oversimplified narrative suggests. It is time to move beyond the blame game and foster empathy and understanding for those navigating the complexities of student loans.

Nobody Goes to College to Game the System

Contrary to popular talking points, most individuals pursue higher education with genuine intentions.

Going to college solely to exploit the system doesn’t make sense. Consider the significant time, effort, and money invested in attending school.

Most students embark on their educational journeys to acquire knowledge, skills, and better career prospects. They seek opportunities for personal growth and professional development.

Thus, it is imperative to dispel the misguided notion that borrowers intentionally subject themselves to the hardships associated with student loan debt.

The Uncertainties of Higher Education

While higher education can be a transformative experience, it doesn’t guarantee success for every student.

Sometimes, despite their best efforts, individuals face circumstances that hinder their educational and career trajectories. Economic downturns, industry shifts, or personal challenges can impact graduates’ ability to secure well-paying jobs and meet their financial obligations.

It is crucial to recognize that individuals who struggle to repay their student loans are not solely responsible for their predicament. Sometimes, even with the best intentions, things don’t work out as planned.

By recognizing the uncertainties and unpredictable nature of life after graduation, we can reconsider the perception that borrowers willingly subject themselves to unfavorable circumstances.

Misleading Practices and Student Vulnerability

The landscape of student loans can be overwhelming and confusing, especially for young and inexperienced borrowers.

Regrettably, some educational institutions and lenders take advantage of this vulnerability, engaging in misleading practices during the recruitment process. They entice prospective students with false promises of high job placement rates, attractive career opportunities, and misleading information about program costs and outcomes.

These practices disproportionately affect vulnerable individuals, including first-generation college students and those from low-income backgrounds, who may lack access to proper guidance and information.

The tactics that some colleges employ serve to help the college’s bottom line at the expense of borrowers and taxpayers. These institutions often misrepresent the earning potential and market demand for certain programs, leaving students with unrealistic expectations and unmanageable debt levels.

Unaffordability: A Systemic Challenge

When borrowers find themselves unable to meet their student loan obligations, it is often due to the sheer unaffordability of the debt.

The rising cost of education, coupled with stagnant wages in many industries, creates a challenging financial landscape. It is crucial to recognize that the inability to repay student loans is not a result of laziness or irresponsibility but rather a systemic issue stemming from unmanageable debt burdens.

Today’s students face far more affordability challenges than their parents and grandparents encountered.

The Vilification of Borrowers and the Power Imbalance

In the discourse surrounding student loan debt, there exists a striking power imbalance.

On one side, we have massive corporations, lenders, and the political elite. On the other, we have former students who aspired to uplift themselves through education. Yet, inexplicably, it is the borrowers who are often vilified.

This narrative needs to change.

Rather than perpetuating blame and stigmatization, we must advocate for reforms that create a fairer and more supportive environment for borrowers. By addressing systemic issues, holding institutions accountable, and fostering empathy, we can shift the conversation toward meaningful solutions.

Final Thoughts on Irresponsible Borrowers

The irresponsible borrower myth is a fallacy that fails to acknowledge the complexities of student loan debt.

Nobody pursues higher education with the intent to exploit the system, and sometimes circumstances beyond borrowers’ control hinder their ability to meet their financial obligations.

Misleading practices and the unaffordability of student loan debt further exacerbate the challenges borrowers face.

Taxpayers are justifiably angry about the massive student debt issue in the United States. However, their ire shouldn’t be directed toward the borrowers struggling to make ends meet.

The post Debunking the Irresponsible Borrower Myth: Understanding the Realities of Student Loan Debt appeared first on The Student Loan Sherpa.

As an individual who has been highly critical of the GOP’s recent stance on student loans, I must admit that I was pleasantly surprised by their latest efforts.

Within their comprehensive package, some notable borrower-friendly proposals and ideas have the potential to empower individuals to make informed decisions about higher education. However, there are also some awful ideas that are potentially detrimental to current borrowers and future students.

In this article, I will delve into the details of this proposed legislation, shedding light on the areas that present opportunities for bipartisan agreements.

What’s in the Republican Student Loan Package?

The student loan and higher education reforms come from five new bills:

• The College Transparency Act (CTA)   
• The Understanding the True Cost of College Act  
• The Informed Student Borrowing Act  
• The Streamlining Accountability and Value in Education (SAVE) for Students Act
• The Graduate Opportunity and Affordable Loans (GOAL) Act

Some of these bills have bipartisan support and present a real opportunity to improve our flawed student loan system. Others are clunkers that would devastate borrowers and future students.

The College Transparency Act (CTA)

The College Transparency Act is bipartisan legislation cosponsored by Republican Bill Cassidy and Democrat Elizabeth Warren.

The bill would require detailed reporting on student outcomes including enrollment, completion, and post-college success across colleges and programs.

Adding transparency to the college selection process would be a huge win for borrowers. More information about job placement numbers, starting salaries, and student loan balances is always good.

Sherpa Tip: This is one area where the government has already made some progress. The Department of Education’s College Scorecard is an excellent resource for selecting a school.

The Understanding the True Cost of College Act

This particular act isn’t new, but it’s a good idea.

The objective of the Understanding the True Cost of College Act is to make it easy to compare financial aid offers from schools.

The act would:

• Require colleges to use a uniform financial aid offer form,
• Establish basic minimum information that must be included on page one of the uniform financial aid offer form, and
• Facilitate the creation of uniform definitions of various financial aid terms.

Like the CTA, this proposed legislation isn’t revolutionary, but it adds clarity to a confusing process, which is good.

The Informed Student Borrowing Act 

The Informed Student Borrowing Act is another attempt to increase transparency in the federal borrowing process.

This bill would change student loan entrance counseling from a one-time event to a yearly requirement.

It would also require that borrowers review median earnings for their particular program, completion rates, and projected monthly payments for their loans.

Lastly, borrowers must request a specific loan amount rather than having the school handle this calculation.

This is one of those bills that sounds like a great idea in theory, but it might not be so great in practice. Better informing borrowers is a reasonable goal. However, these new requirements could easily become burdensome hurdles that drive borrowers to risky private loans.

Careful implementation would be critical to this bill if it becomes law.

The Streamlining Accountability and Value in Education (SAVE) for Students Act

The SAVE Act is where things will start to get controversial.

On the positive side, it would automate enrollment in income-driven repayment. Under current federal law, automating IDR isn’t allowed, so this would be an improvement for borrowers.

Additionally, it would eliminate the nine current repayment plans and reduce the number to two. In the interest of avoiding borrower confusion, it is a step forward.

However, the terms of those two repayment plans become critically important. This is where the bill transitions from potentially helpful to awful for borrowers.

The 10-year repayment plan, like a cockroach in the apocalypse, survives.

The only other plan becomes the REPAYE+ plan, a new variation on the REPAYE plan. REPAYE+ would help borrowers with smaller balances qualify for forgiveness quicker, count certain deferments and forbearances toward forgiveness, and allow borrowers to make up missed payments to keep progress toward forgiveness.

Unfortunately, there are many downsides to this new plan. For starters, it would prevent the creation of President Biden’s proposed new repayment plan. The Biden plan is far more affordable than the proposed REPAYE+ plan.

The legislation would also prevent the Department of Education from creating new federal repayment plans.

The Graduate Opportunity and Affordable Loans (GOAL) Act

The GOAL Act is where things get ugly.

The stated objective of lowering the price of college is one that everyone can agree upon. College is too expensive, it is driving the student loan crisis, and it needs to get fixed.

However, the proposed legislation is not the answer.

To fix the problem of high education costs, Congressional Republicans want to eliminate Graduate PLUS loans and put restrictive caps on borrowing for graduate students.

The theory is that if people don’t have sufficient federal loans, they won’t be able to afford graduate school, so colleges will have to lower prices.

Pricing people out makes graduate school a privilege available only to the wealthy. If you think our healthcare and legal systems are unfair to the poor, imagine what would happen to those systems if only the wealthy could access medical or law school.

Sherpa Thought: This one is personal to me, and it is hard to be objective. If it weren’t for Graduate PLUS loans and the high borrowing limits, I wouldn’t have been able to attend law school. I wouldn’t have been able to serve my community as a prosecutor, and I wouldn’t be able to help borrowers as the Student Loan Sherpa.

Cutting the cost of higher education has to be a priority, but we can’t do it in a way that restricts access to education.

Will the GOP Legislation Become Law?

President Biden would almost certainly veto the GOAL Act and the SAVE Act. Both acts would also have uphill battles in the Democratically-controlled Senate.

The legislation that creates more transparency in borrowing and school selection has a realistic chance of passage. Even if the particular acts announced this week don’t pass in their current forms, the ideas behind them have broad support. There is a good chance we will see some of these changes happen in the coming years.

Opportunities for Progress

Earlier this month, Republicans passed legislation that would have canceled the one-time forgiveness plan currently before the Supreme Court. Buried in that legislation was language that would have retroactively charged borrowers interest from the student loan payment pause.

The bill was sure to get vetoed by Biden, and it was seemingly crafted to punish borrowers.

In stark contrast, the new legislation package seems like a step forward. Some proposed bills may generate sufficient bipartisan support to become law.

If you have a healthy dose of optimism and squint just right, it looks like there is a chance Congress might make some progress on the student loan crisis.

The post Breaking Down the GOP’s New Student Loan Legislation: What It Means for Borrowers appeared first on The Student Loan Sherpa.

For large families, things are even more challenging. Multiple kids mean multiple tuition bills and more extensive planning.

Changes coming to the FAFSA for the 2024-2025 school year will present even more hardships for families with multiple kids in school at the same time.

Smart planning won’t necessarily make things easy, but it will open the door to some possibilities that would have otherwise been impossible.

A Note from the Sherpa: This topic is highly personal to me. I’m the oldest of five kids, and at one point, all five of us were attending college.

My education wouldn’t have been possible without a combination of parental help, grants, scholarships, in-state tuition, student loans, and working year-round.

Things were not easy, and we made mistakes along the way, but all five of us got the education we needed.

Multiple Kids Means Extended Planning

Getting one child through college requires serious planning. I think it is critical that families make a plan for an entire education rather than thinking one semester or even one year at a time.

The challenge with multiple kids is that family resources are finite, and it is really hard to spread things out fairly.

If you burn through all of your resources helping your first child attend school, what will your other children do?

What happens if you set aside money for all of your kids and the youngest child doesn’t attend college?

What do you do if one child decides to attend an expensive school while another child gets a scholarship and needs less help?

You may already know the answers to these questions. You may not. The critical detail is that you think about these possibilities.

Landmines to Avoid

The best approach for allocating resources will be unique to your family and your individual values.

However, there are a few definitive mistakes that all families will want to avoid.

Don’t Cosign for Too Much Debt – If private student loans are necessary to pay for college, be careful with cosigning. In most cases, a cosigner is a necessity to get a private loan. Getting approved for that first loan might be easy. However, as the cosigned debt balance grows, the cosigner’s DTI will look worse and worse. If you are not careful, by the time child number three is in college, private loans may not be available.

Be Careful with Parent PLUS Loans – The nice part about Parent PLUS loans is that the credit check is much easier. Parents can borrow as much as necessary to pay for the cost of attending college. The danger here is that you can rack up so much debt you will never be able to repay it. Many senior citizens have their social security checks garnished because of federal student loans.

Mistakes with too much debt could mean that you cannot assist your younger children with school.

Planning for College as a Family

Many parents and children make the mistake of treating college as an achievement earned through hard work.

At best, college is an investment. Some investments are better than others, and some are unaffordable.

Managing money is an essential skill to survive in our society. Including your kids in the college planning will help them develop this skill and encourage them to make smart decisions when selecting a school.

Don’t Get Fooled by the Sticker Price

Some schools have high tuition but take steps to make things affordable. Other schools seem more affordable but could cost more.

At Harvard University, tuition is over $55,000 per year. However, according to the Department of Education’s College Scorecard, the average annual cost is only $13,259. For a family with an income between $48,000 and $75,000 per year, the average yearly cost drops to $538.

Compare that to a public school like Ohio State University. In-state tuition is just over $12,000 per year. However, the College Scorecard found that the average annual cost was $18,623. For a family with an income between $48,000 and $75,000 per year that average annual cost is a staggering $14,619.

The lesson here isn’t that private schools are more affordable — in many cases, they are the more expensive option.

Instead, I’d like families to take away two important nuggets of information:

1. The listed price of a school often has very little to do with the cost of attending that school. Careful planning requires digging deeper.
2. The Department of Education College Scorecard is a gem. For each school, there is a wealth of data to help families make informed decisions.

New FAFSA Issues for Large Families

Recently, legislation was passed with the reasonable goal of simplifying the FAFSA. Unfortunately, the planned simplifications will make college much more expensive for larger families, starting with the 2024-2025 school year.

The FAFSA is used to calculate a student’s EFC (Estimated Family Contribution). If the EFC for one family is $10,000, need-based financial aid is granted assuming the family can contribute $10,000. If four kids are currently in college, the $10,000 EFC drops to $2,500 per student.

Starting with the 2024-2025 school year, the EFC doesn’t get divided by the number of children attending school. In other words, if four kids are in school simultaneously, each has the original EFC of $10,000.

If there are years when multiple kids will be in school, things may become exceptionally difficult.

Sherpa Tip: Even though the number of children attending college will no longer influence aid calculations, the question remains on the FAFSA.

When the time comes, students can file an appeal with the school asking for more aid on the basis that there are multiple kids in school. This process won’t guarantee a good outcome, but it could save large families thousands of dollars each year.

Additionally, many schools have their own financial aid resources, and these applications may still consider how many children are attending college.

Getting Creative with Assistance

Writing a big check each semester is unaffordable in many households — especially if you have multiple kids in school.

If money has to get borrowed, the safest bet is having your child get a federal student loan in their name. Federal loans have the most repayment flexibility and the most generous forgiveness options.

If federal loans to the student are insufficient, some families elect to go with either cosigned private loans, Parent PLUS loans, or home-equity loans. Each option comes with unique pros and cons that must be weighed carefully.

Another option is to focus on helping your kids with repayment after school. For many kids, this form of assistance will be more appreciated, and this approach can help families split resources more efficiently.

If one child gets a six-figure computer programming job after school and another child struggles to find a job, a perfect 50/50 split may not be the best approach. Delaying some assistance for student loan repayment makes this option a possibility.

Don’t Stretch Too Far

Sometimes the best thing you can do for your child is to bluntly inform them that they cannot afford to attend their preferred school.

It sucks, and it’s not fair, but it is reality.

It might also be the best decision for your child.

We think of someone who is 18 as an adult, but their brain is still developing. It isn’t until around age 25 that people are fully equipped to make rational decisions instead of emotional choices.

Paying for school is tough, and it is even more challenging with multiple children. Once you factor in the expected price increases over the years and the potential cost of graduate school, the numbers get crazy quickly.

Don’t overextend yourself financially because you don’t want to fail your kids. If anyone failed, it is the leadership in this country that allowed college to become a privilege for the wealthy rather than something reasonably attainable for all.

Affordable options exist that can suit just about any budget. The key is to look at things critically and be willing to make tough choices.

The post How Large Families Can Plan for Multiple Kids to Attend College appeared first on The Student Loan Sherpa.

Other than a couple of notable exceptions, someone who is 18 has the full rights and responsibilities of an adult.

Why do we draw this line at 18? Is there that much difference between a 17-year-old and an 18-year-old?

Today we will dig into what it means to be an adult and examine how changing the definition of adult might impact college and student debt in the United States.

The Human Brain at 18

The consensus of the scientific community is that the teenage brain — even at age 18 — is still in development.

Most notably, the prefrontal cortex doesn’t reach maturity until about age 25. This is significant because the prefrontal cortex is the area of the brain used for rational thought. Teens often process information with their amygdala, the emotional part of the brain.

Put simply, the average 20-year-old doesn’t have the ability of an average 30-year-old to make rational decisions. Clearly, there are exceptions to this general observation, but there is a mountain of evidence to suggest that brains are not fully developed at 18.

The Implications for Student Loans

Borrowing money for school needs to be a rational decision. Someone considering a college or debt needs to consider the potential cost of school vs. the benefits. Even in the best of circumstances, the decisions made in planning and paying for college are complex.

However, many high school seniors don’t engage in this analysis. They look at things from the perspective of attending their “dream” school. They might not find it fair that a classmate has opportunities that they don’t. That teenager might decide they deserve to go to the expensive school, even if it isn’t affordable or a wise decision.

This sort of decision-making happens when someone doesn’t have a fully developed prefrontal cortex. Instead of engaging in rational thought, they use the amygdala and make and make an emotional decision.

The Student Loan Significance: This analysis is critical in student loans because borrowers can be shackled to this debt for life. Those who face financial hardships often discover that student loan rules are far more harsh than credit card or mortgage debt.

Additionally, student debt is typically incurred at a much younger age than most credit card, mortgage, or other consumer debts.

In Defense of Making 18 the Age of Maturity

The science on aging isn’t clear on an exact age or definition of maturity.

On one hand, this makes sense. Just as people grow at different rates, brains mature at different rates.

On the other hand, this presents a significant issue. How do we define an adult for the purposes of signing a student loan contract? What happens if the age gets moved to 25?

If an 18-year-old student can’t sign up for a student loan, it might mean they can’t attend college. Are we doing more harm than good if we change the age-based rules?

Turning 18 also provides a clear, bright line. Some people may reach maturity before, others after, but everyone is on notice that things change at 18.

Additionally, college presents an opportunity for growth. Even if not fully mature, an 18-year-old leaving home for the first time has the chance to make mistakes, learn, and grow. Precluding someone from attending college because they are not fully mature could be a step backward.

Protecting Vulnerable Populations

The most helpful change might be the simple recognition that people are still learning, growing, and evolving at age 18.

It doesn’t mean they can’t make adult decisions. Instead, it means they are a more vulnerable segment of our population.

Think about all of the tools and resources that we have available for seniors. As a society, we recognize that some people have declining cognitive abilities beyond a certain age. Because of this, we create policies and tools to protect seniors from abuse. Things are far from perfect on this front, but it is better than doing nothing and leaving seniors to fend for themselves.

If an 18-year-old is vulnerable to making a decision based on emotion rather than reason, we must find a way to protect this age group from potential abuse.

Rethinking Bankruptcy and College Recruitment

If a potential student doesn’t have a fully-developed prefrontal cortex, they may be especially susceptible to recruitment based on emotion. Some for-profit colleges have a well-documented history of “pain points” recruitment — these schools used fear and pain to induce students to enroll.

Maybe the answer is to prohibit colleges from making an emotional appeal to encourage students to enroll. Perhaps we should penalize the schools that use these tactics if they lead to lousy student outcomes.

Along the same lines, we should reconsider how student debt gets handled in bankruptcy.

The history of student loans in bankruptcy is particularly cruel if we consider it from the perspective of not-yet-mature students who made decisions with devastating consequences. Recent policy changes show how easy it would be to help out former students who made ill-advised borrowing decisions.

The Constitutional Basis for Treating People Differently by Age

Most people know that someone who is 18 has their right to vote guaranteed by the 26th Amendment to the Consitution.

However, this isn’t the only mention of age in the Constitution. Article I of the Constitution says that an individual must be 25 to serve in the House of Representatives and 30 to serve in the Senate. Article II states that someone must be at least 35 to become President.

The founders recognized that people lacked the maturity for certain offices until far beyond the age of 18.

It’s time we all started thinking differently about the maturity of the average student loan borrower.

How to Protect Students Right Now

Public policy changes don’t happen overnight, but there are many steps that parents and advisors can take to help the young people in their lives.

Telling an 18-year-old that they are too young, emotional, or immature will probably only lead to an emotional response.

However, you can guide them through the rational thoughts necessary to pick a college and pay for an education.

Similarly, if a school is making an emotional plea to a student, you can point out that they are trying to manipulate the student into making an irrational decision.

There are no easy answers to this issue, but if we ask the tough questions, we can improve things for all.

The post Brain Development, College Planning, and a Lifetime of Student Debt appeared first on The Student Loan Sherpa.

However, your good luck or generosity can quickly become misfortune if you are not careful. Money issues between family members are notoriously tricky.

For this reason, it is critical to discuss several topics before any money changes hands. An awkward conversation today could ensure the survival of a meaningful relationship and help avoid a very ugly situation in the future.

Don’t ask for tuition help. Only offer what you can afford to lose.

Asking someone for help paying for college is asking for trouble. You are putting a family member in an awkward position, and if they help, they may resent you for asking.

Likewise, volunteering to help pay for school is a huge commitment. Even if you are loaning money and charging interest, you still need to assume that you might never see that money again.

Be very clear about loan terms.

When it comes to helping someone pay for college, the line between a gift and a loan can get blurry if you are not careful.

If a student thinks they received a gift while the family member thinks they offered a loan, it makes for an ugly situation. An undergraduate education typically takes four to five years, and in that time, memories can fade.

Drafting a contract might make it seem like you don’t trust the other person, but it is a great way to ensure that everyone understands what is supposed to happen.

Discussing the difference between a loan and a gift is essential—however, other details matter. Repayment terms like interest rate and how long you have to repay the loan are pretty obvious. However, there are additional details to consider.

Discuss what happens if you can’t pay.

Everyone goes to college with the expectation that it will lead to a great career and be a worthwhile investment. In many cases, this assumption holds true.

Unfortuantely, there are times when things don’t go according to plan.

You might not find a job. How will you repay your family member if you don’t have a job? If the economy turns and you face a rough job market, what are the expectations in that situation?

You might not graduate. Nobody goes to college expecting to drop out, but it happens all of the time. Repaying student loans is especially difficult for people who don’t get a degree.

Talk about what to do if something happens to either of you.

Sometimes health and outside circumstances derail your plans. What happens if the student borrower becomes disabled and can’t repay the loans? What happens if the family member passes away before the borrower can repay the debt?

These are complicated situations even to consider, but they are real possibilities that must be accounted for.

Make sure everyone is on the same page.

In most student loan contracts, there is a lender and a borrower, and nobody else is involved.

In a family lending/gift situation, circumstances are much different. If grandma pays for one grandchild to attend college, do all the other grandchildren expect the same help?

Jealousy can make a nice gesture turn sour very quickly.

Cosigning a loan might be better.

Sometimes a traditional student loan works better than less formal help from a family member.

Cosigning a loan is a huge responsibility, but it can make a huge difference in paying for college. A typical student loan also has detailed provisions covering all difficult conversations that are otherwise necessary.

By cosigning, you can avoid gift taxes that might otherwise complicate helping pay for school.

Just make sure you shop around to get the lowest interest rate and best loan terms available.

The post Tips for Borrowing/Lending Money Between Family to Pay for School appeared first on The Student Loan Sherpa.

Most Americans recognize that college has become more expensive and has contributed to the growth of student loan numbers.

However, these generally accepted facts only tell part of the story. Understanding the problem requires asking some difficult questions.

Why have younger Americans struggled when previous generations didn’t have the same issues? How do we wrap our minds around the struggles of new borrowers? What can be done to fix the student loan crisis?

Three Figures Show the Generational Struggles with Student Debt

In a now-viral and well-researched Reddit post, user MikeTheBard pulled wage, rent, and college statistics for three generations.

He found the following:

*Note: The Public College tuition figure uses the average cost for one year of tuition at a 4-year University.

At first glance, these figures might seem unremarkable. For each generation, the cost of rent and tuition increased, but so did the minimum wage.

However, the growth of tuition and rent prices dramatically outpaced minimum wage.

The Working Hours Necessary to Pay Tuition

In 1972, a college student could pay for tuition by working about 168 hours. If this student worked 14 hours per week for 12 weeks during the summer, they could pay tuition expenses for the year.

By 1992, the numbers had shifted. A college student would have to work 553 hours to cover tuition for the year. If a 1992 student worked just over 46 hours per week during the summer, they could cover tuition costs for the year. Alternatively, they could work fewer hours during the summer and pick up some work during the school year to cover tuition for the year.

A student in 2022 would have to work 1,426 hours to cover tuition for the year. Today, a student would have to work 119 hours per week during the summer to pay tuition for the school year. Alternatively, they could work 30 hours per week year-round to cover the cost of tuition. However, this path only works if their parents provide food and housing.

A Calculation Note: These simplified calculations do not include taxes that would have to be paid on the income. These numbers also do not account for the possibility that some students might earn more than the minimum wage of their era.

However, by looking at the ratio of tuition or rent compared to the minimum wage, we can get an idea of the comparative difficulty of paying the bills for each generation.

Rent Prices Further Hurt College Affordability

As anyone paying for college knows, paying tuition is only part of the affordability equation. Putting a roof over your head has also gotten much more expensive.

In 1972, a minimum wage worker could cover their monthly rent by working 68 hours (or about 17 hours per week).

By 1992, a minimum wage worker needed to work just over 105 hours to cover rent for the month. That means just over 26 hours per week of work just to pay rent.

Today, a minimum wage worker must work 183 hours per month to put a roof over their head. Even at 40 hours per week, a minimum wage worker can afford today’s average rent.

College Affordability by Generation

For Baby Boomers, paying rent and tuition at a public college on a minimum wage job was a reasonable route. Student loans wouldn’t have been necessary. Hard would still be required, but this was a feasible option for most.

For Generation X, things got more challenging. Covering rent and tuition for the year would have required a full-time minimum wage job. Factoring in taxes and other living expenses, a student in 1992 likely needed to earn more than minimum wage or get help to pay for college for the year. Hard work plus an occasional student loan could get the job done.

Generation Z cannot pay rent and tuition for the year on a minimum wage job. The numbers just don’t work. Even if we exclude all other living costs and taxes, a student in 2022 would still have to work 76 hours per week at a minimum wage job to cover tuition and rent for the year. Help in the form of student loans or parental contributions is necessary today.

$15 Minimum Wage Doesn’t Fix the Problem

One obvious takeaway from these numbers is that minimum wage hasn’t kept pace with expenses. Economic analysis shows that the real minimum wage, when adjusted for inflation, is at its lowest point since 1956.

Even if we raised the minimum wage to the often discussed figure of $15 per hour, a minimum wage worker still can’t work their way through college without outside help.

Doubling the current minimum wage would make the challenges of a current student look more like those faced by a student in 1992. Even at $15 an hour, a student in 2022 still faces a far more difficult path to a degree than a 1972 student.

Put simply, the cost of tuition at a 4-year public school is way too high. And this is based on a yearly tuition of $10,338. Many current students at public schools pay far more than this average amount. Students at private colleges face even more significant affordability obstacles.

The Lesson from the Numbers

To be clear, the lesson here isn’t that Baby Boomers had it easy. Even in 1972, working and paying your way through school was a considerable challenge. Getting a degree without any debt took hard work and sacrifice.

The point is that in 2022, hard work, determination, and sacrifice are not enough. We have a college affordability crisis.

Until we fix the affordability crisis, the student loan crisis will continue to fester.

The post Three Numbers Explain Why We Have a Student Loan Crisis and How to Fix It appeared first on The Student Loan Sherpa.

The headline terms are 0% interest and streamlined Income-Driven Repayment. Both would be an improvement.

Unfortunately, the LOAN Act is likely to cause more issues than it fixes.

The Leveraging Opportunities for Americans Now (LOAN) Act Basics

Under the LOAN Act, new federal student loans would not charge interest. Instead, they charge a financing fee when the loan is first borrowed.

For undergraduate students, there is a one-time financing fee of 20%. For graduate students and parents, the financing fee jumps to 35%.

The default repayment plan is an income-based repayment plan that charges borrowers 10% of their discretionary income. However, borrowers would have the option of repayment on a standard 10-year repayment plan. Borrowers that quickly could have the financing fee partially refunded.

Notably, the income-based repayment is automatic. Borrowers wouldn’t have to apply each year manually.

The Problem with Rubio’s 0% Interest Loan

The idea of 0% interest usually sounds too good to be true. In this case, it is definitely too good to be true.

The massive “finance fees” mean borrowing money for school is still expensive.

For example, suppose you borrow $10,000 to pay for a year of graduate school. By borrowing that $10,000, you agree to repay the government a total of $13,500 (the original $10,000 plus the 35% financing fee).

How does this loan compare to a traditional loan that charges interest rather than massive fees? If you borrowed the same $10,000 for school and repaid the debt over ten years, that equates to a 6.3% interest rate.

The math gets complicated quickly, but the important takeaway is that there are still borrowing costs associated with these loans. Calling them 0% interest loans without this context is highly misleading.

The Biggest Issue with the LOAN Act

Rubio’s plan is a fascinating thought exercise.

In theory, it makes borrower costs far more straightforward. It also simplifies repayment.

The Rubio approach might make sense if we were designing a federal student loan system from scratch.

Unfortunately, we already have an extremely complicated system in place. We have too many loan types, too many servicers, too many repayment plans, and too many rules. Simplicity should be the goal.

The LOAN Act creates two significant complications to federal student loans.

1. It makes a mess for current students. Rubio’s plan would mean that all new student loans were issued with hefty financing fees. How does a student who has two years of old loans and two years of new loans manage their debt? How do borrowers and servicers handle two completely different federal systems?
2. It makes paying for college more confusing. If the LOAN Act becomes law, it would be difficult for students to compare federal loans against private loans. How does an 18-year-old student compare a private loan with a 0% interest loan with a massive financing fee?

Sherpa Thought: It is also worth noting that the LOAN Act wouldn’t actually do anything to fix the student loan crisis. It doesn’t lower college costs. At best, it only makes living with the debt more manageable.

Massive reform is a good idea, but any real changes will have to address the cost of school.

What the LOAN Act Gets Right

Federal law currently prevents the IRS from sharing income information with the Department of Education unless the borrower authorizes the disclosure. This rule is why borrowers must certify their income each year to stay enrolled in income-driven repayment plans.

Rubio’s plan to automate IDR enrollment has been discussed for years by members of both parties, but it hasn’t ever become law.

There is bipartisan support for automated IDR enrollment, and there isn’t a good argument against it. Hopefully, Congress can pass some legislation to address this fixable issue.

Does the LOAN Act Have Any Chance of Passing?

Rubio has introduced this proposed legislation on multiple occasions, and it has never passed.

Republican support for the bill seems very limited, and Democratic support appears nonexistent.

In other words, the LOAN Act is unlikely to become law, no matter how many 0% interest headlines you see.

The post Rubio’s LOAN Act Promises 0% Interest, but it Doesn’t Deliver appeared first on The Student Loan Sherpa.

Sadly, many high school students are woefully unprepared for the significant financial decisions that await. High school seniors must make choices that will greatly influence their financial future.

The good news is that college can still be an excellent investment. However, it requires some planning and asking a few tough questions before making any decisions.

To ensure that college becomes a source of great memories rather than regrets, every high school student should know the following:

You will have to repay your student loans.

Student loan forgiveness is all over the news. Borrowers are desperate for help, and media outlets are happy to provide content that gives them hope.

To be clear, some forgiveness in the near future is highly likely.

However, if you are currently in college or about to head off to college, don’t make the mistake of assuming there will be any loan forgiveness.

The idea of loan cancellation has been debated for years. Only one party has shown any interest in debt cancellation, and their interest has been fleeting. They also don’t have a very good track record of accomplishing their goals.

If forgiveness happens one day, make it a pleasant surprise. Don’t make the mistake of betting your future on politicians delivering on a promise.

College isn’t always a good investment.

There was a time when any college degree meant a great employment outlook.

Unfortunately, a college degree no longer guarantees a desirable job. Making matters worse is the fact that many parents and guidance counselors are unaware of this fact.

Before committing to any school, a prospective student should know the following:

• The graduation rate for their major
• The percentage of people who find jobs in their field
• The average starting salary for people in their major

Tools like the college scorecard make this exercise much easier.

The idea is to make sure that the degree pays off. If a large percentage of students don’t graduate or they can’t find jobs, the investment becomes very risky.

Sherpa Tip: Many for-profit colleges are notoriously bad investments. If the recruiter from your school pushes very hard to get you to attend, that should be a red flag.

Federal loans are much safer than private loans.

If you decide that borrowing is necessary to pay for school, you should probably select federal student loans.

Private lenders like to point out that private loans sometimes have lower interest rates. While this is a true statement, the federal perks almost always justify a higher interest rate.

For starters, federal student loans have income-driven repayment (IDR) plans. The idea behind these plans is that they help ensure student loan bills stay reasonably affordable. IDR is far from perfect, but it is a much better option for repayment than the far stricter private loan options.

Additionally, federal loans provide various paths to student loan forgiveness. If you end up working in public service or struggle to repay your loans, the forgiveness provisions can be a tremendous resource.

Student loan nightmares happen, but they are avoidable.

Many students look at student loans from an extreme perspective. Some students think it is ok to borrow whatever is necessary, regardless of the cost or their field of study. Other students desperately avoid any student loans.

In reality, student loans are a helpful tool, but only when used properly. If your field of study is a good investment, student loans can help you get to the classroom and enter the workforce sooner.

As an easy rule of thumb, I usually suggest students borrow no more than their expected starting salary. If you expect to earn $55,000 per year at gradation, running up a $100,000 tab is a horrible idea.

The amount you repay is much larger than the amount you borrow.

When borrowing, many students overlook the interest that accumulates during school.

Suppose a college freshman borrows a single $5,000 federal direct loan. The current interest rate on these loans is 4.99%, and they have a loan origination fee of 1.057%. By the time this borrower enters repayment, the loan will be well over $6,000.

In repayment, many borrowers are distressed to learn that some or all of their monthly payment goes towards interest instead of the principal balance of the loan.

Interest makes repayment an uphill battle, making a smaller loan balance significantly more expensive to eliminate.

Your peers may make horrible mistakes.

Many students make borrowing mistakes during college.

Some people borrow too much to pay for a degree that isn’t worth the debt. Others spend too much on housing or a spring break trip.

In finance, people often assume that if everyone else is doing it, it must be reasonable. Don’t fall into this trap.

Every year students make huge borrowing mistakes. They assume they will get a great job that is unlikely to happen. Some don’t even consider the consequences of their debt. Others believe the loans will be forgiven.

If you substitute the judgment of others for your own, it could take decades to undo the damage.

College is still a great opportunity, but extra planning is now required.

The point of this article is not doom and gloom, and it isn’t to suggest that people shouldn’t go to college.

College is still an excellent opportunity for many students. You don’t have to live in a tent during school and only eat ramen noodles.

Go to school. Have fun.

However, before you sign up for any student loans, take some time to do some planning. When you are a college graduate trying to pay your bills or buy a house, you will be glad you were careful with your student loan borrowing.

The post What Every High School Student Should Know About Student Loans and College appeared first on The Student Loan Sherpa.

As our collective understanding of student loan risks has grown, many students now try to avoid student loans at all costs. This approach can pay off handsomely under the right circumstances.

Many of these students fear borrowing even a single student loan. Is a $3,000 student loan dangerous? Can $5,000 of student debt still cause a student loan nightmare?

High Default Rates on Smaller Loan Balances

If there is one scary aspect about having a smaller debt balance, it is this fact: the smaller your balance, the more likely you are to default.

The solution to this problem is not borrowing more.

The scary debt statistics for small-balance borrowers require some context. The single biggest factor impacting the default rate is whether or not the borrower graduated college. Students without a degree are three times more likely to default than graduates.

The default rate for small-balance borrowers is the highest because many have never finished school.

The lesson for those considering a small student loan: The risk level depends on whether you graduate. If your small loan won’t lead to a degree or a higher-paying job, it has major risks.

Small Student Loans as a Great Investment

The flipside to our risk assessment is for the borrowers who require a small student loan to finish school.

Your smaller student loan could be an excellent investment if you are a $3,000 tuition payment away from getting a degree.

A degree could mean a pay bump of significantly more than that $3,000 in the first year alone. As a graduate, you are much less likely to default than the small-balance borrowers who don’t finish school.

The Lesson: If the one thing separating you from graduating is a small student loan, it is often safe to borrow a smaller loan.

Student Loan Headaches that Impact all Borrowers

Even if your student loan is a good investment, you still may have to deal with some of the burdens of life with student debt.

Borrowers are often targeted for student loan scams. Additionally, repayment usually involves headaches like dealing with servicers, loan transfers, and lender errors.

In most cases, these issues amount to temporary inconveniences. However, borrowers with smaller student loans still have to endure various student loan problems.

Deciding Between Federal and Private Loans

For the vast majority of students, picking a federal student loan is an easy decision.

Federal student loans offer income-driven repayment plans to keep bills affordable. They also provide various paths to student loan forgiveness. Private lenders cannot compete with these borrower perks.

The one area where private lenders occasionally beat federal loans is on interest rates. Federal loan interest rates are set by Congress, and they also include loan origination fees. Credit-worthy borrowers can sometimes find better interest rates with a private lender.

Balancing the more forgiving federal terms against the lower interest rates on private loans is especially complicated for borrowers who only need a small loan. If you expect to repay your loan within a couple of years, chasing the lower interest rate could be very tempting.

Running the Numbers: Suppose you need a $5,000 student loan, and the federal interest rate is 5.5%, while the best private loan interest rate is 2.5%.

A 3% interest gap on a $5,000 balance means spending an extra $150 per year on interest. Do you want to save that $150 per year in interest, or would you rather have the federal perks and protections?

Avoiding a Mistake on a Small Student Loan

If you are considering a small student loan, I’d suggest having two essential items in place:

1. Make sure you will graduate.
2. Create a plan and a backup plan to repay your loans.

If you are in your first year of college, don’t assume you will limit your borrowing to one small student loan. You have more planning to do. Someone who is a semester or two from graduation can move forward with far more confidence.

Finally, don’t assume you will land a high-paying job or even an average salary for someone in your field. What happens if you spend six months or a year finding a job? What happens if you can’t find a job in your desired field?

If you are prepared to manage the debt even if things go poorly, it is probably safe to borrow a small student loan.

Next Steps:

• Learn about the federal student loan perks and benefits.
• Shop around to find the private loan with the lowest possible interest rate.

The post The Risks and Dangers of a Small Student Loan appeared first on The Student Loan Sherpa.