WEBVTT NOTE This file was generated by Descript 00:00:14.762 --> 00:00:19.492 Booth: Today on MOM-enomics, we are going to be talking about student loans. 00:00:20.102 --> 00:00:24.932 So if you missed the last episode where I sat down with Lindsay Phillips, a 00:00:24.932 --> 00:00:29.012 professional college counselor, and I asked her all the questions about 00:00:29.012 --> 00:00:33.552 the college application process, you definitely want to go back and watch 00:00:34.097 --> 00:00:39.277 that episode It is fantastic and it's filled with a ton of great information, 00:00:39.747 --> 00:00:44.187 but during that episode, we very briefly touched on student loans. 00:00:44.197 --> 00:00:47.707 So I'm going to give you a little more detail on the different 00:00:47.717 --> 00:00:52.217 ones that are available and how the interest on them works. 00:00:52.963 --> 00:00:58.443 So just to give a little recap from the prior episode, the FAFSA, which 00:00:58.443 --> 00:01:02.183 is a form you'll have to fill out that opens on October 1st of each year, 00:01:02.629 --> 00:01:06.979 The FAFSA gives you what's called your SAI, your Student Aid Index. 00:01:07.634 --> 00:01:10.494 Used to be called the EFC, it's a little different now. 00:01:10.894 --> 00:01:15.294 Uh, and this will tell you the financial aid you are eligible for. 00:01:16.594 --> 00:01:20.834 And the sticker price, as you might find when you're googling the cost 00:01:20.834 --> 00:01:25.074 of a college or something like that, that schools post on their 00:01:25.074 --> 00:01:29.394 website, that is rarely the amount the student is actually going to pay. 00:01:29.444 --> 00:01:31.854 So don't let some of those sticker prices shock you. 00:01:32.829 --> 00:01:36.519 And then you have what's called the cost of attendance, the COA. 00:01:36.859 --> 00:01:42.509 And this is a college's total estimated cost for one year. 00:01:42.849 --> 00:01:47.129 Everything from tuition, room and board, books, supplies, 00:01:47.679 --> 00:01:49.399 some transportations in there. 00:01:49.479 --> 00:01:50.879 All of that, all in one. 00:01:50.879 --> 00:01:53.254 And it's important that you apply for each year. 00:01:53.504 --> 00:01:57.794 every grant and scholarship that you can be eligible for. 00:01:58.254 --> 00:02:04.144 These monies do not need to be repaid and they can greatly, greatly lower the 00:02:04.154 --> 00:02:08.824 amount that you end up paying for college. 00:02:09.174 --> 00:02:13.904 And remember, most schools allow you to stack your scholarships. 00:02:14.174 --> 00:02:17.764 So that's definitely something to check on with the school you're applying to. 00:02:18.029 --> 00:02:20.899 If you have multiple scholarships available to you. 00:02:21.939 --> 00:02:26.239 And then student loans should be a last option. 00:02:26.659 --> 00:02:32.829 Unfortunately, a lot of people still have to take student loans out, and it is 00:02:32.829 --> 00:02:38.874 important if you have to take a student loan out to understand the way they work. 00:02:39.314 --> 00:02:41.294 So federal student loans. 00:02:41.894 --> 00:02:48.104 So these are going to be preferred over private student loans, and they 00:02:48.104 --> 00:02:50.984 are based on your financial need. 00:02:51.564 --> 00:02:57.144 So the best one you would want to qualify for is a subsidized federal student loan. 00:02:57.264 --> 00:03:00.234 Not everyone's gonna qualify for this, but this is the best case 00:03:00.234 --> 00:03:02.184 scenario for a student loan. 00:03:03.114 --> 00:03:06.634 So in this federal student loan, the government is paying the 00:03:06.634 --> 00:03:11.064 interest while you are in school and during any grace periods. 00:03:11.724 --> 00:03:16.044 So the interest that is your responsibility, it doesn't begin accruing 00:03:16.794 --> 00:03:19.794 until the actual repayment plan starts. 00:03:20.104 --> 00:03:23.334 So you're saving a good bit in interest right there. 00:03:23.844 --> 00:03:26.479 Then you have the federal Unsubsidized. 00:03:26.659 --> 00:03:31.759 So these, they do not pay the interest for you, and that interest begins 00:03:31.819 --> 00:03:34.879 accruing as soon as you receive the funds. 00:03:34.909 --> 00:03:40.159 It doesn't wait until the repayment plan starts, so it begins accruing as soon 00:03:40.159 --> 00:03:47.339 as the funds are received, and it's your responsibility to pay that interest. 00:03:48.559 --> 00:03:51.429 So what are the interest rates? 00:03:52.099 --> 00:03:57.639 So if you're listening to this podcast, um, just audio, you may want 00:03:57.649 --> 00:03:59.109 to go check out the YouTube version. 00:03:59.129 --> 00:04:02.299 I've got some slides showing all this information and it could be, 00:04:02.329 --> 00:04:06.429 um, Just make the dialogue a little easier to follow and just be great 00:04:06.489 --> 00:04:08.129 references for you down the road. 00:04:08.829 --> 00:04:11.129 So here, what are the interest rates? 00:04:11.349 --> 00:04:12.949 So these are the published rates. 00:04:13.769 --> 00:04:17.119 It's a screenshot directly from their website. 00:04:17.259 --> 00:04:23.829 So you can see that the direct subsidized and unsubsidized loans currently have 00:04:23.829 --> 00:04:26.919 a fixed interest rate of 6.53 percent. 00:04:27.459 --> 00:04:31.749 That fixed interest rate means it will not change for the life of the loan. 00:04:31.789 --> 00:04:33.489 So that will always be your interest rate. 00:04:34.149 --> 00:04:39.169 Also here on this chart are rates for graduate school, professional 00:04:39.169 --> 00:04:44.089 type loans, but right now we're just focusing on this undergraduate one. 00:04:44.139 --> 00:04:47.799 You can see the rates are higher for graduate students 00:04:48.439 --> 00:04:49.789 and professional students. 00:04:51.209 --> 00:04:56.279 And the interest on these loans accrues daily. 00:04:56.459 --> 00:05:02.139 So you would basically take your, your amount of your loan times your interest 00:05:02.139 --> 00:05:04.379 rate, and that would give you your. 00:05:04.624 --> 00:05:08.524 Annual interest due, and then you would divide that by 365. 00:05:08.574 --> 00:05:13.344 So that would give you your daily interest rate that is accruing. 00:05:14.054 --> 00:05:16.054 So let's just kind of look at a simple example. 00:05:16.114 --> 00:05:23.674 So if you take out a $20,000 loan at that current fixed rate of 6.53%, your daily 00:05:23.684 --> 00:05:27.514 interest that's going to accrue is 6.53. 00:05:28.179 --> 00:05:34.109 So if you have the direct subsidized loan, that daily interest is paid for you 00:05:34.119 --> 00:05:38.419 while you're in school and during your grace period and any deferment periods. 00:05:39.759 --> 00:05:45.829 With the direct unsubsidized, that daily interest is your responsibility 00:05:45.989 --> 00:05:48.889 to pay during all periods. 00:05:49.949 --> 00:05:55.879 So the interest adds up, even though you aren't required necessarily to be making 00:05:55.879 --> 00:06:02.019 payments during all the periods on that unsubsidized loan, the interest still is 00:06:02.029 --> 00:06:08.079 accruing, it's adding up, and depending on your repayment plan, it may even 00:06:08.079 --> 00:06:13.309 be capitalized onto your loan balance, the principal amount of your loan. 00:06:14.309 --> 00:06:20.219 So with direct subsidized, that interest doesn't begin accruing 00:06:20.399 --> 00:06:22.799 until the repayment plan starts. 00:06:22.919 --> 00:06:26.359 So it's not accruing that whole time just when the funds were received. 00:06:27.079 --> 00:06:32.019 With the direct unsubsidized, that interest, prior example of 6.53 00:06:32.039 --> 00:06:36.689 a day, it is accruing from day one when the funds are received. 00:06:37.209 --> 00:06:42.839 So if the repayment plan starts one year after receiving the funds and you 00:06:42.839 --> 00:06:44.419 haven't paid interest along the way. 00:06:44.799 --> 00:06:48.779 That one year interest accrual is going to be $1,307 that 00:06:48.879 --> 00:06:50.479 you're responsible for paying. 00:06:51.109 --> 00:06:55.289 Generally, you've got multiple years in there because you're most likely 00:06:55.289 --> 00:06:57.109 going to be in school for four years. 00:06:57.159 --> 00:07:00.939 So just think about all of that interest that's accruing along the way. 00:07:02.329 --> 00:07:06.709 So if your repayment plan capitalizes interest, then that 00:07:06.849 --> 00:07:11.849 $1,307 that had accrued would be added to your principal balance. 00:07:11.969 --> 00:07:14.669 And in this example, it was a $20,000 loan. 00:07:15.109 --> 00:07:20.939 And so that new principal balance would be $21,307 and interest would now be 00:07:20.949 --> 00:07:23.389 calculated on that higher balance. 00:07:23.709 --> 00:07:29.179 So it's very, very important to know if your interest will be capitalized because 00:07:29.179 --> 00:07:33.574 it can obviously increase the amount of total interest you'll end up paying. 00:07:34.534 --> 00:07:38.304 So here's a capitalized example, and we're just going to assume that no 00:07:38.304 --> 00:07:43.904 payments are made during four years of school, and that $10,000 is what was 00:07:43.904 --> 00:07:46.034 received at the beginning of year one. 00:07:46.599 --> 00:07:54.269 At the 6.53 percent fixed rate, it accrues $653 in interest in that first year. 00:07:54.809 --> 00:07:59.069 The principal balance is now $10,653. 00:07:59.589 --> 00:08:05.534 So the next year, that interest is calculated on 10,653 dollars. 00:08:06.664 --> 00:08:12.484 So the second year, your interest is 695 versus the 653 the first year. 00:08:12.934 --> 00:08:17.554 And you can see in this example, it goes down through year four, where at the end 00:08:17.554 --> 00:08:22.474 your principal balance is now $12,878. 00:08:22.954 --> 00:08:28.434 Where the interest accrued each year was added to the principal balance. 00:08:28.474 --> 00:08:34.669 So very, very important to know if your interest will be capitalized, especially 00:08:34.689 --> 00:08:40.969 if your loan is over a long term, as far as until your repayment plan 00:08:40.969 --> 00:08:42.599 starts, because all of that's adding up. 00:08:43.689 --> 00:08:48.339 And then the kind of last resort would be a private student loan. 00:08:48.379 --> 00:08:52.659 So if you don't qualify for either of the federal student loans, you may have 00:08:52.659 --> 00:08:54.599 to take out a private student loan. 00:08:55.099 --> 00:08:58.699 And these are offered through various lender sources. 00:08:59.289 --> 00:09:02.449 There's online sources, there's banks, the whole nine yards. 00:09:02.499 --> 00:09:07.109 There's a whole lot of options for private student loans, and it's very, very 00:09:07.109 --> 00:09:14.714 important to know the terms of your loan because they can be vastly different and 00:09:14.714 --> 00:09:19.364 can greatly change the amount of interest that you're going to end up paying. 00:09:19.844 --> 00:09:23.384 The rate that you get in these loans is credit dependent. 00:09:23.384 --> 00:09:25.804 It's kind of like a normal loan you would get at the bank. 00:09:25.934 --> 00:09:33.514 So if you do not have You have bad credit and most young people don't have credit 00:09:33.514 --> 00:09:38.504 yet, so at least you don't have bad credit yet, but you're going to need a cosigner. 00:09:39.114 --> 00:09:41.964 So you're bringing a whole nother party to the table. 00:09:42.414 --> 00:09:46.734 But if you are bringing a cosigner to the table, the stronger their credit 00:09:46.784 --> 00:09:50.224 is, the better your rate is going to be. 00:09:50.294 --> 00:09:54.344 So when considering a cosigner, consider someone with good credit. 00:09:54.674 --> 00:09:58.174 good credit that is willing to go sign your loan for you. 00:09:59.464 --> 00:10:02.694 And in the private student loans, they could have fixed rates or 00:10:02.694 --> 00:10:04.084 they could have variable rates. 00:10:04.434 --> 00:10:08.834 Very important to know if yours is a fixed rate like the federal ones 00:10:08.844 --> 00:10:13.624 just were, where the interest rate is going to stay fixed that same 00:10:13.624 --> 00:10:15.834 amount the whole life of the loan. 00:10:16.404 --> 00:10:20.584 Whereas variable rate, the interest rate can change throughout the 00:10:20.594 --> 00:10:25.924 life of the loan and it can greatly change the amount of interest paid. 00:10:26.644 --> 00:10:31.739 Now with the private student loans, almost always the interest begins 00:10:31.769 --> 00:10:35.789 accruing when the funds are received. 00:10:36.539 --> 00:10:40.519 And then that interest that is accrued and unpaid is almost 00:10:40.519 --> 00:10:42.719 always capitalized as well. 00:10:42.789 --> 00:10:48.739 So it's very important to know the terms of your loan, what the rate is, 00:10:49.289 --> 00:10:54.569 fixed or variable, What's, uh, when the interest is accruing, if the interest 00:10:54.569 --> 00:10:59.949 is capitalized, and how your payments will be applied towards your principal 00:10:59.959 --> 00:11:02.649 balance when your repayment plan starts. 00:11:03.319 --> 00:11:07.769 So it's kind of hard to give very specifics for private student loans 00:11:07.809 --> 00:11:10.249 because they can be so different. 00:11:10.769 --> 00:11:15.379 It's very important to just know the terms of your loan and how 00:11:15.379 --> 00:11:19.899 it's going to work and how much you're going to be paying for it. 00:11:20.839 --> 00:11:26.089 So with the variable rate thing, a lot of times a variable rate loan comes 00:11:26.089 --> 00:11:28.839 into play when interest rates are low. 00:11:28.839 --> 00:11:34.169 And so it's very enticing to do the variable rate loan because that starting 00:11:34.169 --> 00:11:38.449 rate is most likely going to be lower than what a fixed rate loan would be. 00:11:38.929 --> 00:11:41.109 So you might get the option of. 00:11:41.179 --> 00:11:41.439 4. 00:11:41.439 --> 00:11:42.759 5%. 00:11:43.179 --> 00:11:47.449 If you've got a $10,000 loan, that interest for one year is $450. 00:11:48.239 --> 00:11:53.569 But if it's a variable rate and that interest rate goes up to, say, 7. 00:11:53.789 --> 00:11:58.109 5%, now you're owing $750. 00:11:58.269 --> 00:12:02.907 So that's a really big difference in the total amount of interest. 00:12:03.604 --> 00:12:09.124 So, variable rates are generally not a good option because there is so 00:12:09.134 --> 00:12:14.294 much volatility, so to speak, in how much interest you will end up paying. 00:12:15.304 --> 00:12:20.909 So, in summary, just kind of remember that student loans, are a last resort. 00:12:20.999 --> 00:12:26.879 You want to maximize grants and scholarships, and you do want to 00:12:26.879 --> 00:12:31.339 keep up with the interest payments as they accrue as best you can. 00:12:31.449 --> 00:12:35.749 I know that these loans are used because you don't have any money, but keeping up 00:12:35.749 --> 00:12:41.044 with those interest payments if you can is definitely crucial, um, and especially 00:12:41.064 --> 00:12:46.654 if your repayment plan is going to capitalize that interest that's accruing. 00:12:48.014 --> 00:12:52.814 And then for the private loans, know the terms of your loan. 00:12:54.014 --> 00:13:01.384 The problem that so many people have with student loans is they don't know the terms 00:13:01.444 --> 00:13:04.624 or understand them going into the loan. 00:13:04.634 --> 00:13:07.374 They don't know if their interest is going to be capitalized. 00:13:07.794 --> 00:13:12.734 They don't know if their rate is going to change all of these things because 00:13:13.114 --> 00:13:18.054 there are a lot of repayment plans where you can end up where your monthly payment 00:13:18.234 --> 00:13:23.844 isn't even covering the interest that is due And so when that happens that 00:13:23.854 --> 00:13:29.192 interest that hasn't been paid keeps getting added on to the loan And so 00:13:29.192 --> 00:13:35.709 it's This never ending cycle because the principal balance is going up because 00:13:35.709 --> 00:13:38.139 the interest isn't getting paid in full. 00:13:38.369 --> 00:13:42.869 So it is very, very important if you take out a student loan, whether it's 00:13:43.099 --> 00:13:49.759 federal, subsidized, unsubsidized, or last resort private, it is essential to 00:13:49.759 --> 00:13:57.019 know the terms of the loan and what that repayment schedule is going to look like 00:13:57.289 --> 00:14:03.119 and what the total interest is going to be on it based on the way it's structured 00:14:03.459 --> 00:14:05.729 and how the interest will accrue. 00:14:06.349 --> 00:14:10.709 So I hope this information has been helpful for you to kind of get a little 00:14:10.709 --> 00:14:18.209 better understanding of how a student loan may work and what the interest is going 00:14:18.619 --> 00:14:23.699 to look like over the course of the loan while you're in school and then afterwards 00:14:23.709 --> 00:14:26.329 when the repayment starts to kick in. 00:14:26.959 --> 00:14:29.109 So stay tuned for next time. 00:14:29.589 --> 00:14:30.369 Thanks for watching.