67: What You Need to Know About Student Loans

Dra. Yvette Martínez-Vu

Hi everyone. Today I have an episode about student loans- all about student loans, all the things I wish I knew about student loans when I was an undergrad. And just some things to consider if you, like me, find yourself having accepted loans, and you're feeling a little uncertain about what you signed up for.

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A quick caveat, I am not a financial adviser. I am not a financial expert. I am not your accountant. So take everything I say with a grain of salt, and make decisions based off your own research- just make an informed decision. Whatever I say, it's for educational purposes only. Make sure that you do your research when it comes to these things- with any matters related to finances.

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But let's get to the topic of student loans. What are student loans? I feel like we hear about that everywhere, and it's become the norm to take out loans. It's extremely frustrating to be part of a system, part of a country, that does not prioritize education, that doesn't make education a universal right for everybody. That makes it so that working class individuals, poor individuals, people of color, especially Black folks, have ended up taking out more loans, more student debt than any other population in the US.

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It's this huge barrier. It's this huge hurdle that gets in the way of people making huge life decisions. I, myself, among my own circle of friends, I've seen a lot of individuals who haven't been able to make these big life decisions because of their student debt. They've said, no, I can't afford to have a child. No, I can't afford to buy a home. No, I can't afford to have a wedding, or whatever milestones they're trying to have in their own personal lives. They've had to either put them on hold or not do them at all, because student debt has gotten in the way.

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A lot of times, there's this association of lenders being predatory, because they're lending to young adults that oftentimes, myself included, don't know what they're signing up for. You're given this contract. You're told, hello, here's this amount of student loans. You qualify for X amount of financial aid, and the rest is loans. Sign on the dotted line. Otherwise, you can't continue. You can't pay for your education. You can't continue. You can't complete your BA. You can't complete your graduate degree. And so a lot of times people feel almost obligated to sign on the dotted line.

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What are student loans? Student loans are money that some sort of entity is providing you, with the expectation that you're going to pay it back. But the expectation of paying it back comes at a cost and there's an added cost. You're not just paying back the loan. You're paying back the loan plus interest. The interest is a percentage of the loan that they're adding to the loan that will accrue over time, depending on how long you take to pay it back. So that's a student loan.

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Now, there are different types of student loans. There are federal loans, and there are private loans. Within the federal loans- and a lot of people get federal loans- you have two options. You have a subsidized loan, and you have an unsubsidized loan. A lot of times when we refer to subsidized versus unsubsidized, we refer to one as the good and the bad one.

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Subsidized is often referred to as the good loan. Although it's kind of hard to say, what is a good loan? I mean, do you even really want a loan? When is a loan good. But it's referred to as a good loan because it's a loan where you don't start accruing interest until after you're done with your program- with your undergraduate degree or your graduate degree. Then you usually have on average, a six month grace period. So for example, if you get a subsidized loan in undergrad, you don't have to start paying it back off- and you don't start accruing interest- until six months after your undergraduate graduation.

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Now, an unsubsidized loan is a loan that you get that starts to accrue interest as soon as the loan is disbursed. If you get a loan that freshman year of undergrad and it's unsubsidized, that means it starts to accrue interest that freshman year- as soon as it hits your bank account, or the financial aid office, or whatever the bursar, or registrar. Whatever office it is that gets your funding in your institution- as soon as it hits, they start to charge you interest. I don't know how much interest rates are- but say it's 5%, 6%- interest rate starts to accrue right away.

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While you're an undergrad, you're probably not making payments yet. A lot of us don't start to make payments until after we've graduated. So it's just good to figure out if you get a federal loan, what kind of loan is it? Is it subsidized? Is it unsubsidized? And it's also good to find out who your lender is.

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Those are some options for federal loans. There are also private loans. Some folks, maybe they don't qualify for federal loans. Maybe they've already used up all of- they've taken out as much as they can for federal loans, and the only option is a private loan. A lot of times for private loans, if you haven't developed credit, or if you don't have high credit- a lot of times, young adults, a lot of my students, they're young adults. They've never taken out a credit card. They haven't developed or built up their credit score. Because of that, oftentimes, you need a cosigner to take out a private loan.

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The thing about private loans is that private loans tend to have higher interest rates than federal loans. Private loans also often don't qualify for programs like the Public Service Loan Forgiveness Program. Private loans may not qualify for other forms of federal forgiveness. So if the government were to say, student debt is going to be forgiven for most US Americans, you might not qualify if it's a private loan, especially if it's a private loan you took on your own outside of your institution- you might not qualify to get it forgiven.

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So private loans- I'm not a fan of. Unsubsidized loans, also not a fan of. If you can take out debt, ideally, you want it to be subsidized. That way, you don't have to worry about that interest building up right away. I wanted you to be clear- subsidized versus unsubsidized. Subsidized, is, quote, unquote, good debt. I hate to call it good and bad. But a lot of times, that's what we refer to. If you had to choose between the two, you want subsidized versus non subsidized. I also wanted to talk to you about federal versus private loans.

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Now, another thing that you want to think about is how much debt are you going to accrue, whether it's in undergrad or in grad school? Realistically, how much debt do you think you're going to have? Is it going to be 10,000, 20,000, 50,000, 100,000? Yes, those are real numbers. Yes, I know several individuals where their student debt ranges from as little as 10k, to as much as six figures.

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You want to be honest and realistic with how much it is that you owe or might owe, both in undergrad and in graduate school. Then, based on that number- there are actually student loan calculators out there- you can start to kind of estimate. If you think- okay well, by the time I graduate, I think I'm gonna owe $20,000 in student debt. And I think that I can pay off, or I can pay $200 a month.

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Then go to that loan calculator and put the amount you owe, 20k. You can pay off $200 a month. Your interest rate is 5.8%. Then it'll tell you how long it's going to take you to pay it off. It might be five years, it might be 10 years, or even more than that. Then you want to think about coming up with a plan, being very strategic about how you're going to pay it off, and selecting a method for paying it off.

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There are two very common methods for paying debt- not just student loan debt, but also credit card debt. They're called the snowball method and the avalanche method. The snowball method- picture a snowball. It's kind of small, then starts to get bigger and bigger. So the snowball method is you start with your smallest debt. Let's say you took out a couple of loans in undergrad, small loans. Then a couple of small loans in grad school, and you have multiple lenders.

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You choose the smallest one first- maybe your smallest one is $500- and you focus on paying off that small loan first. Then once that's paid off, whatever money you were using towards paying off that small loan, you put it towards the next smallest one. So you go from the smallest to the next smallest, to the bigger ones.

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Eventually, you're going to pay off all of it, but you're starting small and going bigger from there. A lot of people like that, because you get that feeling of progress. You start to pay off smaller loans, and you start to see that one loan is paid off, and another is paid off and another is paid off. You get that satisfaction of seeing that you're paying off your debt.

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Another method, though, that will still get you to pay off your debt- maybe it doesn't give you that immediate sense of satisfaction, but it still works- is the Avalanche method. It really is a personal preference, and what works better for you. Do you like to have instant gratification? Or would you rather kind of stick to a more long term method of payment that's still going to pay off a good amount of your debt?

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So what is the Avalanche method? The Avalanche method is similar to the snowball, where you're being very strategic about which debt you're paying off. But with avalanche, you're paying off the debts that have the highest interest rates first. Remember, not every lender is going to give you the same interest rate. If you took out some loans in undergrad, and you took out some loans in grad school- depending on the lenders, depending on what loan it was, you may have different interest rates.

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So you start with the highest interest rate first, and you pay it off every month. Once you pay off the highest interest rate, you use that money that you were going to use for that high highest interest rate loan, and then you put it towards paying the next highest interest loan. Again, put all your money towards one. Pay it off, then put all your money towards the next one. Pay it off, then put all your money towards the next one, and pay it off. Over time, you will eventually pay off all of your debt.

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Those are two very common methods of paying off student debt and credit card debt. Another strategy that I've seen folks do- and I've actually implemented it myself. I'm technically not done paying off my student loans. I graduated from graduate school in 2016. So I'm five years out of grad school, and I should be done paying off my student debt in about a year. And I'm not gonna lie, I did have some credit card debt. And I have student debt. My husband has student debt and credit card debt.

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Just within the last year, we paid off our credit card debt. There's a lot of shame associated with owning up to having debt, because a lot of us aren't taught financial literacy. But we shouldn't be ashamed. There's a lot of shame, there's a lot of guilt, there's a lot of fear. But you really have to kind of be honest with yourself and confront the numbers and come up with a plan.

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Thankfully, we got very serious about learning about financial literacy a few years ago, and since then created a plan and have been implementing and following through with that plan. So we've paid off our credit card debt, and we're very close to paying off our student debt. The other thing I wanted to say that some of us have done, including myself, is the windfall method.

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What I mean by that is, anytime you make any extra income that you weren't accounting for, that's not part of your regular income, use that towards paying off your debt. What's an example of this? Maybe during tax season, you get this big lump sum paycheck that you weren't really counting on. You can use that towards paying off your debt, especially if you have savings and you're good. You don't have to worry about emergency savings, you got something saved up. Using the rest towards your debt,-your student debt, credit card debt, whatever forms of debt.

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Other things that might come up is, maybe you have side hustles and you're making extra income that way. Maybe- I know, some folks last year did that with their stimulus checks. They got that extra income, they used it towards paying off their debt. So any extra money that you weren't counting on, no matter how little it is- putting it towards paying off your student debt. That will make a big difference in the long run.

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Another option in terms of paying off student loans that I've seen some do is consolidating your debt. Let's say you have multiple small debts, multiple lenders. It can be kind of confusing to be checking multiple websites to check your debt and to pay it off. Some people choose to consolidate it. They take out another loan. All of their federal loans, they put it into one. They consolidate it. Usually people do this and they end up with a smaller interest rate.

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The thing about consolidating your debt is that you usually have a term to pay it back off. So let's say they give you five years. In five years, you have to pay off this big consolidated loan. And if you don't pay it off within that five year term, then that interest rate might jump up even higher than what it was before. Sometimes you may end up even owing more than what you started off with if you don't pay it off within that term.

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I recommend consolidating your loans if you have a very specific and attainable plan for paying it off of. If you know you're making a certain income, a steady income, and that you can pay it off within that period no problem. You should go ahead and consolidate your debt. Otherwise, kind of be careful with that.

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What else do I want to say? I want to give you some examples of what it looks like to pay off your student debt, because I know it can feel so abstract when you're still a student, and when you haven't quite landed your first full time job. Let me give you three scenarios of what could happen. And this might or might not be true for you. But just three scenarios, three types of salaries of what might happen after grad school.

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So let's say you get your PhD and you go on the tenure track job market. You really want to become a professor. You don't land a single job, and you end up adjuncting. You end up becoming a lecturer. You end up trying to book teaching gigs, and you can only really make $30,000 a year. When you think about your salary- and I know I've mentioned this in another episode on early career moves.

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But when you think about your salary, you want to not just think about the number, but think about the actual take home pay after benefits and taxes. The way I calculate it in my head is by taking out one-third of that number. If you make $30,000, then your take home pay might be closer to $20,000. So then $20,000- you divide that by 12 months. All of a sudden you have $1,600 a month to live off of.

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So then $1,600 a month- take out whatever it is that you pay for rent, and then take out whatever it is you pay for utilities and bills. How much are you left with to actually pay off your student loans? Let's say you're left with 200 bucks a month to pay off your student loans. And let's say you actually did your best, you focused on getting scholarships. You got your PhD fully funded. You only took out $10,000 in undergraduate loans. They were all subsidized loans, so you haven't started to accrue debt.

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So you only owe $10,000 after your PhD. You got a 5.8% interest rate. You can pay us 200 bucks a month. How long is it going to take you to pay that off? Five years- crunch the numbers, go to a calculator. If I did it correctly, it'll take you five years to pay it off. Remember, I told you I'm five years out of graduating from my PhD and I'm going to pay my debt off in about a year or so. I'll just tell you, this is fairly accurate in terms of how long it will take you.

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Now let's say you land a decent job. Instead of adjuncting, you decide to pursue a full time staff position, and your starting salary is $60,000. It's more than you've ever made before in your life, and you feel like, I'm doing great. Okay, 60k. What's your take home pay? Take out one-third- 40k. 40k divided by 12- what's your monthly pay? Monthly pay is $3,300. Now take out your rent or your mortgage or your other bills- your utilities, your food, your groceries, all that stuff. How much do you think reasonably you can pay off a month towards your student loans?

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Let's say you owe more than that. Let's say you owe $50,000. You took out 20k in undergrad, 30k in grad school, and you owe $50,000. Let's say it's a 5.8% interest rate, and reasonably you think you can afford to pay 500 bucks a month towards your loans. How long do you think it's gonna take you to pay off that debt? I crunched the numbers. It's gonna take you eleven years to pay it off. Yes, at 500 bucks a month, if you owe 50k, it'll take you eleven years. That's accounting for the interest and all of that.

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That's a long time. But if you do it consistently, it's eleven years. If you pay off even more- you have all these windfalls, if you hustle, you have side hustles- all that. You make extra money, keep paying more and more and more. It might be less than eleven years. But if you just do 500 bucks a month, it's gonna take you that long.

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Now, let's say you actually are in a field that has the potential of making a high salary. Let's say you get a master's or a PhD in Engineering, and you land an entry level position with a starting salary of $90,000. That's really great pay. You're feeling really great. No one in your family has ever made that much before. You're not used to living off of that much. You think for sure, I can pay off my debt, because I'm used to living on very little. I'm going to live off of just half of what I make. Okay, you're making $90,000?

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What's your take home pay? Take out a third. Now you're actually making 60k. What's 60k divided by 12, what's your monthly pay? You're getting 5k a month to live off of. You know that you are used to living in a humble way, or in a modest way, or in a frugal way. You're gonna live off of $2,500 a month and the other $2,500 is gonna go towards your student loans.

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But since you got a Master's or PhD in Engineering, and they didn't offer you a lot of funding, you ended up taking out $80,000 of debt. Let's say you owe 80k, and you're paying off $2,500 a month. That's like childcare, right there. As a mom, I'm like 2500 bucks a month- that's full time childcare right there. Yes, childcare is expensive, but I'm digressing. It's $2,500 a month to pay off 80k debt.

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How long do you think it's going to take you? Three years. That's right, according to one of the payment calculators that I checked online. You can crunch your own numbers. I might be wrong, but based off what I estimated, it'll take you three years to pay it off- to pay off $80,000 of debt if you're making that salary, and if you are willing to pay off that much a month. So $90,000 salary, 60k to live off of, 5k a month but you're only actually living off of $2,500 a month. The other $2500 is going towards debt every single month, three years.

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You see what I mean? How this is all so relative. It really depends on how much you make, how much loans you took out, what the interest rates are. And realistically, how much you think you can commit to paying off every month. Then on top of that- I don't think I mentioned- but there are actually different forms of repayment plans.

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A lot of times, people freak out. I did too. Like, oh my gosh, when the six months is up, I'm going to start to have to pay off my debt. What if I can't afford it? I don't know what I'm going to do. But there are different repayment plans. One of them- the one that I've been on for the longest- is the income based repayment plan. The income based repayment plan makes it so that they take into account how much you make, and then they estimate an amount that you can reasonably pay off based off of your income.

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In some cases, if people have a low enough income, your monthly payment is zero. It literally is zero. That doesn't mean you necessarily should pay zero, but they don't expect you to pay anything more than what you can afford based off your income. So that's another thing. I didn't even look into the different types of repayment plans, but that's something that you can also look up yourself - different forms of repayment plans for federal loans. See what comes up for you.

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Now, if you are an undergraduate who recently graduated, and you know that you're maybe taking a gap year, and your student loan payments are going to start to kick in in six months. Or maybe you are a student who just accepted a Master's program, and you're a little stressed out about your funding options. You know that realistically, you're probably going to have to take out some loans. I have some action items for you.

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What are some of the things to do? If you are starting a program- so you're starting graduate school, and you just accepted a certain amount of loans. What should you do? You should contact your financial aid office and find out, how much are you being offered? Find out what type of loan it is- like I said earlier- federal, private, subsidized and subsidized.

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Find out who your lender is. There are different lenders. The common ones are Navient, or Fedloan, or Nelnet. Just find out who are the lenders. Who are the people whose websites you're gonna have to log on to to find out how much you owe? Find out also when the loan is being dispersed, because remember, if you have unsubsidized loans, as soon as that loan hits your account, you're gonna start to accrue that interest.

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So find out when it's going to be dispersed. It's also good to find out when it's going to be dispersed, because as soon as you sign up for classes, right away your graduate program is going to try to charge you for tuition. It's good to know, to make sure that when you're getting the loan is also around the time that you have to pay your tuition, so that you don't end up having any kind of late fees.

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Then another thing, just to kind of ease your anxieties, is try to come up with a future budget. Try to think about your debt management plan. How do you think you're gonna pay it off? How long do you think it's going to take you to pay it off? Think about that based on what type of salary you think you're gonna get out of graduating. Maybe you think you're gonna make 30k or 40k, or 50, or 60k out of graduating.

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Then think about- maybe that's what I'm going to make, but then this is going to be my take home pay. And this is going to be my actual monthly amount. This is how much, based on my current lifestyle, I think I can reasonably pay off for student loans every month. Then think about how long is it going to take you to pay all of that off, by going to a student loan repayment calculator-looking that up.

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I think if you do that, you'll feel a lot less overwhelmed and anxious about this process. I'll tell you this. I'm not a fan of student loans. I don't recommend it. I don't encourage it. But I also understand that sometimes it's your only option. In my case, for instance, it was. I did receive a good amount of financial aid as an undergraduate. But even then, I still had to take out loans. Even though I come from a single mom with six kids from a low income background, I still had to take out undergraduate loans.

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For graduate school, even though I was fully funded, I ended up staying an extra year and a half in grad school. I ended up having a baby. I ended up having all these extra expenses, and I did take out a loan in graduate school- again, even though I was fully funded. Sometimes, there's no other option. So it's good to just find out as much as possible. Make informed decisions, come up with a plan. The more you can face your money issues, the better off you'll be.

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I waited a long time to learn about financial literacy, I waited a long time to start to get comfortable with looking at my bank account, with starting to get comfortable with looking at my spending habits. Like I said earlier, there was a lot of shame. There was a lot of guilt. There was a lot of fear. Even nowadays- I've made it a habit every month to create a monthly budget, a spreadsheet, and to check my numbers, and then create a new budget for the next month.

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So I'm very familiar with my spending habits. I'm very familiar with my money. I'm comfortable with it. I still sometimes, I dread it. Like, oh- now it's time for me to check what I've been doing or to confront it. Sometimes I don't want to have that monthly budget meeting with myself. But I know that I have to. I know that it's good for me.

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And it has actually empowered me. It has given me more options. It has allowed me to make plans for the future, has allowed me to save. That's the reason why I was able to make the big leap last year and purchase a home. That's the reason why I was able to make the leap last year to having another child.

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This was all because I took that step a few years ago of starting to learn more about financial literacy. Now a few years later, I'm learning more not just about financial literacy, but about financial independence, about financial liberation- if that's a thing. I'm just gonna call it a thing. I don't even think that's a phrase I've heard out there. But learning more about money, so that way you don't associate it with negativity, and instead associated as a tool that allows you to get from point A to point B.

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That's what I hope for you all. I hope that you all will also make it a goal of yours to learn about financial literacy on your own. Not from me, because again, I'm not your financial adviser or financial expert. I am still on my learning journey too. But I highly recommend learning about financial literacy. First, creating a budget, getting comfortable with your spending habits- owning up to it, confronting it. The more you do it, the easier it'll get, the better off you'll be.

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Eventually you'll get to a point where you will feel financially empowered. No matter how much or how little you make, you will be able to make informed decisions about your future that are based on your dreams and your ambitions, and not just your guilt and your shame and your fear.

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Okay, I went on a rant there. But all of this has to do with student loans. How I'm not a fan. Sometimes you just have to take them out and you got to come up with a plan and you got to own up to it and learn about what it is you signed up for. So I hope that some of this information was helpful. If you have any other questions about student loans, feel free to reach out to me. I'll share what I know based on my experience, and I will talk to you all next time.