Loans, School, & You

A great deal of people ask questions like “should I take out a loan for school?” “Is it better to pay out of pocket?” Everyone’s situation is a little different and everyone has a different motivation for schooling, particularly court reporting or stenography schooling, but maybe if we focus on one thing that is the same, we can help potential students decide what’s best for them.

Loans and interest confuse people. There are hundreds of articles on the topic and lots of ways it’s been explained. Today, there are many people coming out against the unfairness of school loans because they pay, and they pay, and the amount never seems to go down. People have even claimed to have paid $20,000 on a $40,000 debt, and still owed $37,000.

Why does that matter? If you understand this stuff, you can avoid being in that situation and you can help others avoid being in that situation. First we’ll go back to savings loans. If you’re around my age, you probably learned about savings interest and had a cursory lesson in compound interest. If you have $100 in an account and it earns 1% interest, you’ll have $101. That $101 goes on to make $1.01 in interest — and it just keeps adding together and snowballing.

Here’s what most modern education never teaches: Loans are the opposite. The interest keeps building up what you owe if you don’t pay it. Let’s create a fictional loan to understand it. The compound interest is now working against you under a new name, capitalized interest. Let’s say you take out $40,000, and your interest is only a magical $33 a month (about 1 percent a year), and the lender only wants a payment of $100 plus interest. So you’re expected to make monthly payments of $133. Ignoring the fact that it would take a long time to pay off this loan, what happens if you miss a payment? The interest gets added to the principal, or total amount you owe. So now you owe $40,033. Now your interest payments are $33.36! And every time you make a payment that doesn’t cover the interest, the interest gets added to the principal, making the interest even higher, and making the monthly payment even more difficult to meet. In many things in life, trying your best will land you in an okay spot. With loan payments, you’ve either got it or you don’t, and not having it can make your situation worse.

So what does this mean? In a nutshell, if you are not pretty sure that you will be able to meet your minimum monthly payments every single month, it does not ever make sense to take out a loan. Missing just one payment can make repayment even harder and increase the chance of missing future payments. If you’re going to set out on a career in court reporting, don’t be afraid to ask your local association for a mentor, and don’t be afraid to ask a mentor what to expect. Don’t be afraid to make a budget. And do yourself a favor when you do make that budget, include play money. If you know that you go on $400 shopping sprees, you either need to have enough money to do that and make your payments or the self-control to reduce your shopping spree lavishness. Whatever you do: Don’t make less than your minimum payment. Math is math, and it will only cost you more in the long run.

That said, for the thriftiest and smartest borrowers, realize that making above and beyond the minimum payment has the result of reducing future interest payments from what they would be if you made the minimum. You can tear out of debt, pay much less interest, and be well on your way to building up your wealth.

The smartest financial choice is always to be debt free. If you have no debt, you have no interest payments. That means more money in your wallet. Look at school loans another way: The lender is investing in the business of You. You are the CEO of You. And now you’ve got the tools to understand that the CEO’s cut is bigger the faster the lender is paid. No shame in a loan, but only insomuch as it grows the business!

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