How Do Student Loans Work? Students (and Even Parents) Aren't Sure…

Heading into college, I didn’t understand anything about loans. I had never had one.

I had never experienced any kind of debt before. The entire concept made little sense to me. And yet, one of my very first actions upon arriving to college as a freshman was going to the Financial Aid Office and signing my name on loan agreements.

I was 18. My parents (who were cosigning) weren’t even there.

In that moment, I instantly gained about $8000 of debt. That was year one of five, and the loan amounts only got bigger with each passing year.

The debt problem is real

Seven out of ten college students will graduate with debt. The average 2016 college graduate had $37,172 in debt.

The question is, what’s worse:

The amount of debt students have? Or the fact that they don’t understand their debt in the first place?

According to very recent surveys, 92.87% of students don’t know the difference between subsidized and unsubsidized loans.

97.9% of students don’t know which loans accumulate interest in-school or during deferment.

75% of students don’t know the difference between private and federal loans.

Only 6% said they knew their repayment terms.

Less than 2% of students knew what FAFSA even stands for.

And not surprisingly by this point, 96% of students didn’t know student loan refinancing was an option after you graduated.

I’m going to be transparent with you. Had you asked me these questions when I was graduating from college, I would have fallen into the majority with every single one of these statistics.

I knew that what I was doing probably wasn’t good, but I had no idea just how bad it was.

And it gets worse….

You may be thinking, well, college students don’t know about these things because they rely on their parents’ knowledge.

And you would be correct. In fact, over 85% of students said they rely on their parents for financial aid and loan information. There’s just a tiny problems.

Many parents don’t understand loans or financial aid either

In an even more recent survey, parents who had at least one child in the 11th or 12th grade or in college were asked some similar questions. The results, though better, still aren’t pretty.

14% of parents knew what FAFSA stands for.

55% of parents knew the difference between subsidized and unsubsidized loans.

33% didn’t know that loans accumulated interest during deferment.

58% of parents though you can refinance student loans through the Department of Education (you can’t).

47% of parents thought their child would be helped by loan forgiveness programs (which also isn’t true)

Lastly, it’s worth noting that 34% of parents thought their child would qualify for loans without a cosigner, even though less than 10% of private loan borrowers would.

The conclusion

If parents are encouraging their children to go to college, and they’re not paying for that college, they need to understand what’s happening. Especially if they’re cosigning on loans. But more importantly, they need to make sure their kids understand any loans they take out.

I understood next to nothing about my loans until I had to start paying them. Or to be more accurate, when I had to start deferring them because I couldn’t pay them.

Because I graduated without a job.

Because my post-college plans fell apart in my last semester, and I had zero back up plan.

But that’s another story

I take ownership of my poor choices regarding college debt. They were decisions made out of ignorance, but they were still my decisions. That said, I’d like future generations to avoid these poor financial moves that students are still making at this very moment.

For my story, and the story of so many others who didn’t know what they were doing after high school, make sure to check out That College Book: Everything Nobody Told Us About Life After High School.

It’s a great read for students, parents, and really, everyone in between. Get it here.

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