Avoid being scammed by student loans
Did you know that the cost of college tuition has continuously increased, skyrocketing by 1375% since 1978? With the new school year just around the corner, students are preparing to start or return to their college careers. Along with any start of the college school year, the concern is usually how to pay for it.
As a Ramsey Solutions Master Financial Coach, the answer to that question for me is always cash. Ideally, you would have savings available to help you cover tuition, room and board, and other college expenses. Bonus points if you were able to start saving when your child was young! But even if that didn’t happen, there are several ways to pay cash for school.
But that’s not what we are talking about today. Today I’m issuing a warning to anyone headed to college, or with a child headed to college, to watch out for seemingly helpful items that come in the mail.
For example, something like this:
My oldest daughter is entering her junior year of college. We are fortunate that she was accepted into a program that provided her full tuition so we don’t have to touch her college savings. (Don’t get too jealous...we still have two kids at home so we aren’t out of the woods yet!)
However, that doesn’t stop the student loan companies from targeting her. We have received the above-mentioned offer in the mail twice already. Their marketing department is good at targeting students who are halfway through college. With a growing number of students dropping out due to finances, this offer is very attractive to what is, unfortunately, a growing number of people.
The student loan crisis is well-documented. Student loan debt in the United States totals $1.73 trillion and grows six times faster than the nation’s economy. And an estimated 38 percent of people who drop out of college before earning a degree do so for financial reasons. Many borrowers are delaying traditional markers of adulthood. Student loan debt is causing major problems for students, their families, and taxpayers.
I know how enticing it can feel to accept such student loan offers, especially if you or your student is entering a field where you think they can quickly repay the loan after graduation. Let’s take a look at this common offer and discuss the red flags that indicate it isn’t a good idea.
Outrageous interest rates
On the right-hand side, notice the interest rates it advertises. At 1.13% and 4.25%, those don’t sound too bad. However, notice the fine print underneath them. I’ll zoom in on it so you don’t have to:
Variable rates “to 11.23% APR” and fixed rates “to 12.59% APR”. And it also says “only the most creditworthy applicants who select the interest repayment option may receive the lowest rate.” (emphasis mine)
Interest rates near 12% haven’t been seen since the 70’s!
“Save time and borrow for the whole year!”
This seems like a good thing. Who doesn’t want to save some time? And no one likes paperwork, right? But borrowing ahead of time just puts you further into debt. You are not encouraged to find or save more money before the next semester. You’re just encouraged to go more easily into debt.
It encourages a co-signer
Not only do they want the student to go into debt, but they want a parent or relative to go into debt as well! It states that students are four times more likely to get the loan with a cosigner. Why is that? Because the student is 19 years old! They don’t have a credit score, credit history, or any experience budgeting or paying bills. The lenders know that the parent or guardian is more likely to repay the loan on behalf of the student. So of course they get approved four times more often. That puts the whole family in debt!
A college education is an important opportunity for many people but should not be an excuse for incurring crippling debt. At the beginning of this blog, I mentioned there are ways to pay cash for a college education even if you haven’t been saving for 18 years. Stay tuned to my next blog to learn more!