Sheldon Vaughn resides in Colorado to the dad of dogs Panzer and Gertie. He has worked in tech during his professional tenure solving software issues so we can all live easier lives. Sheldon also has an interest in helping others avoid the pitfalls in the world of paying for college. Here he is to share with you his experience and actionable tips to learn from his endeavor.
The year is 2008. My parents never talked about, let alone saved, any money. Thus I was a fresh out of high-school 18-year-old trying to figure out how to pay for college. I sat in my backyard, with a laptop in front of me, quickly realizing I’ve needed to cut down on screen time for at least 12 years at this point. I figured I’d take out a loan and as long as I had reasonable success after college, paying it back would be no problem. Oh my sweet sweet ignorance was so blissful then.
The loan I signed up for was $15,000 at a 12% interest rate which is double what I would have paid for a federal loan. But, I didn’t have to repay these loans until after I graduated, so this was a problem for future Sheldon. Since the loans were private unsubsidized loans they started accruing interest from day one, so this was a big problem for future Sheldon. More on this in a bit.
Interest and Loans 101
It’s 2014 and I’m sitting in a hotel in Irvine, California. In front of me, my laptop where I am working tirelessly to write a computer program that will calculate the amortization period of a credit card debt.
That a-word, ah-more-tih-zay-shun is the second most important part of any loan – the process of paying the loan off. So why this painstaking activity of programming these calculations?
Surely there’s a tool online that could calculate loan repayment periods. However, I was assigned this project for a class and naturally when I was testing my program I used two data points I was familiar with, my own credit card and my private student loans.
The repayment period of any student loan and credit card depends largely on two numbers.
Principal Balance: This is the amount you have borrowed, the debt you have accrued, you know, the amount you’ve charged up on that sweet piece of plastic with a seemingly endless limit.
Interest: Interest is a percentage of your principal balance that you need to pay back on top of your balance to pay a lender for letting you borrow their money.
Interest is always represented as a percentage. High interest is great for investments and savings accounts, not so much for credit cards and student loans.
As it applies to student loans, your monthly payment will be 1% of the loan, so if you have $50,000 in loans when your repayment period begins, expect a $500 a month payment.
Back to My Student Loans
When I graduated from college in 2012, I was quickly contacted by my friends who had lent me the $15,000 (I received scholarships and federal loans for the final 3 years of my education) to let me know my payment would be $207 due the first of every month. Great, $207 a month, for a $15,000 loan would mean 72 months (6 years) of repayment. That math was incredibly wrong in so many ways, let’s take a look at why.
The $15,000 I borrowed was accruing interest for four years, from August 2008 to May 2012 at a rate of 12%. This meant that the amount I owed on the loan was going up by close to $1,800 a year, for four years, and I now owed $22,000. $22,000 is a sum of money I like to call a ‘pretty nice brand-new car’ worth of money. This isn’t even the worst part of the story, folks. For two reasons, one I’m going to explain why, two it’s going to require doing some math.
My student loan payment, as I mentioned, was $207 a month, multiplied by 12 months. I was paying close to $2500 a year, but my loan was still accruing interest at a rate of $1,800 a year.
This meant that I was paying off my student loan at a sluggish pace of $700 a year and $1,500 was going towards interest. I would pay off my original $22,000 loan in 30 years for a grand total of $50,000.
Thank goodness I had just graduated with a liberal arts degree from the university that CollegeChoice ranks as the 8th best college in Colorado.
Real Life Hitting Me in the Face
I want to take this time to illustrate the scenario of your student loan payment without the context of interest, simply as part of one’s monthly expenses. When I graduated from my prestigious school, my first job paid $31,200 a year.
After putting money into my retirement account, I took home two monthly paychecks each for around $900. My rent, off the bat, was $600 a month and combined with my student loans, I was out an entire paycheck off the bat. Over 10% of my take home pay was being spent repaying my private loan. A private loan that didn’t look like it was going to disappear for 30 years.
Hindsight is 20/20
There was hope in sight for me, I found a company that would refinance my student loans. This means they buy out your entire student loan, and you repay the re-finance company instead of your initial lender, usually with a lower interest rate. In my case, it was cut in half to 6%, but the best solution is avoiding problems like this in the first place and of course I’m going to tell you how:
- As early as possible in the school year, have your parents file their taxes and fill out FAFSA®. FAFSA® is an oddly difficult to say acronym for the Free Application for Federal Student Aid. You will quickly find out the most important number of your college career, not your GPA, but your EFC (Expected Family Contribution). This is a dollar amount that tells you how much the government thinks your family can put toward your education, and the government will give or lend you money for the rest.
- Using the information presented from FAFSA take as many federal loans as possible, subsidized first, then unsubsidized, before borrowing from private lenders. Subsidized loans don’t accrue interest while you’re in school. Remember how my loan jumped from $15,000 to $22,000 while I…rigorously studied? Subsidized loans will not do that. These loans will have an interest rate set by the federal government that has nothing to do with your credit score.
- Don’t borrow more than you need. When I was in college, the loans I borrowed also went to pay for my room and board, but my rent was $300 a month and Totino’s pizzas were four for five dollars. I had tons of extra money at the end of each semester. That’s pretty awesome, right? I would spend it visiting exotic places like Jacksonville, Florida, and Corpus Christi, Texas. I am now paying back a dollar fifty for every dollar I spent on those trips.
- If you do need to sign up for a private loan, and your parents have good credit, ask them to cosign. The better credit you have going into a loan the better your interest rate will be. If you are uncomfortable talking to your parents about this like I was, please email Wade & I directly and we will tuck in our shirts and talk to your parents about finance. No one will be happy about it, but you’ll be less in debt in the end.
- This might be the most important. Consider attending a community college for the first year while you take general education courses. I spent four years getting my liberal arts degree for $60,000, and then spent two years in community college studying computer science for around $8,000. The classes were in the evening, much smaller, and taught by professors from Colorado Universities or, often even better, people who worked in the fields they taught. Higher tuition doesn’t always equate to better value.
- Scholarship opportunities don’t end after high school. Speak with admissions offices and advisors on what scholarships are available throughout your entire college journey. My junior year I was presented with a scholarship I didn’t even know existed from the political science department for good grades. I would’ve loved to snag that free money 2-3 semesters earlier.
Summing It Up
College is definitely a time to learn by doing, but in this case please let my learning by doing pave your way to make better decisions. The fact that when you’re 18, you can borrow sums of money that would equate to 4-5 ‘pretty nice brand-new cars’ is pretty wild and more advantageous to lenders than it is to borrowers. Do the research you need to become a confident borrower and you can get a college degree without being overwhelmed by student loans for decades after.
If you’d like to reach out to Sheldon, you can find him on Instagram @sheldawgthewizard.
