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Paying Off School Loans

Let’s face it, there are loads of us who foot the bill for college ourselves. This isn’t to say we didn’t try to get some help. We did seriously consider writing to one of those scholarship competitions for “left-handed, only-children of divorce who are shorter than 5’0” or “Scottish-Armenian Americans who love to garden.” But, these sources really never panned out. So, like thousands before us, we became school loan borrowers.

Do we really know what’s up with these loans? Now that we’ve signed on the FAFSA line, we need to get straight on the money we’ve borrowed.

First, let’s look at two loan types: “Subsidized” and “Unsubsidized.” (Like Stafford or Perkins loans). What does the word subsidized mean in plain English? To you and me, subsidized means F-R-E-E. When we have a subsidized loan, the government kicks down the money to pay the interest. Specifically, the government will pay all the interest that piles up (“accrues”) on our loan while we’re enrolled in school, at least half time. The government won’t pay forever, but they will pay as long as we remain in school.

If subsidized means F-R-E-E then guess what? Unsubsidized means N-O-T FREE. The government won’t pay interest while we’re in school or when we leave. We’re on our own here.

Yeah, yeah, you say … that’s great, I’m really excited to pay. But what I really want to know is how much? What kind of interest are we talking about? Well, I’m not gonna kid ‘ya, we’re talking about lots. Think of all the days you sit in class, all the days you don’t, every month, every year. Are you thinking of all these days? Good, because that’s the number of days we’re paying interest. Unsubsidized loans charge us interest from the very minute our loan is disbursed until the loan is paid in full.

ALERT: We don’t have to sit around while our lender makes off with our money. (This is the inspiring part.) But don’t kid yourself, if you do sit around this is what you can expect. (This is the depressing part.) Our lender will do something called “capitalize.” This is the practice of adding our unpaid interest to the principal balance of our loan. How does capitalization work? Well, our lender allows the interest we haven’t paid to add up (“accrue”) for an amount of time they choose. Sometimes lenders let it accrue for a quarter, sometimes six months; ask your lender for specifics. Then, our lender lumps all this interest on top of our principal debt. Why’s this a big deal? Because our lender makes money from charging us interest on our principal debt; the bigger our debt, the more interest our lenders make. So, each time our lender “capitalizes,” they help themselves out. Here’s the equation in their eyes: capitalized interest = larger principal debt = increased monthly payment from the student = more money repaid to me (the lender).

Don’t freak though. I promised there was something we can do about this. (This is the inspiring part again.) We can tell our lender to take a hike by starting to pay this interest A.S.A.P. I know this isn’t the solution you were dreaming about. But, this solution is one we’re capable of doing, right now.

Here’s the plan. Gather your loan paperwork together. Find out which loans are unsubsidized. Get in contact with your lender or loan officer and tell them, (It helps if you act all confident and everything) “I, in my infinite wisdom, have decided to begin making interest payments on my loans immediately!” Now don’t get nervous if the loan officer you’re speaking to passes out. Try to be sympathetic; it’s not that often that loan officers run into students who are psyched to pay for their debt right away. It’s even less often that loan officers run into students who are actually educated about the money they’re borrowing. So, don’t blame them. Just stay calm, repeat yourself, and prepare to begin a life where your lender isn’t making more from you than s/he needs to.

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So what’s the moral of this story? Learn what type of loan(s) you’ve got and keep the following in mind: Lenders are not your friends. Sure, they make it possible for us to go to school, but don’t kid yourself … lenders are largely in it for the money.

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