"Tips When Taking Out Student Loans"
Considering that the average student loan borrower graduates with more than $26,000 in debt, you need a strategy to keep your loan debt from ballooning out of control. After all, student loan debt could affect your or your child’s quality of life after graduation. Normally I would personally write my tips given my years of experience with financing college and student loans however the 8 tips that Forbes magazine has put out are spot on and provide great advice on everything you need to know before taking out student loans so I have shared them below. Here are eight rules to help you reduce the burden:
1. Don’t take on debt that’s more than your expected first year’s salary.
Calculate your total debt for all years of school. To get a ballpark estimate, multiply your first-year loan by the number of years of your program — for instance, multiply by four if you’re earning a bachelor’s degree. That should get you to within 15% of your total loan debt. To find salary information, check out websites such as salary.com, payscale.com or glassdoor.com.
Ideally, your total debt should be a lot less than your expected starting salary so you can pay your debt in 10 years or less. (If your debt will be higher, don’t despair. In certain situations, this rule doesn’t apply. More on that below.)
“If you devote more than 15% of your monthly gross income for those student loans, you’re going to be struggling to make those loan payments or you’re going to be adopting a very austere lifestyle or you’re going to be working two jobs to help you pay back the debt,” says Kantrowitz. “You could do a deeper analysis with a budget of all four years for where you are getting your money from — how much from savings, how much from education tax benefits, how much from parent help -- but often times, that will likely not be more accurate [than the ballpark estimate] because circumstances change.”
2. Start looking for free money now.
While student loans are extremely helpful, they have to be paid back. Grants and scholarships, on the other hand, don’t. Check out free scholarship-matching sites such as fastweb.com, studentscholarshipsearch.com and collegescholarship.org. According to Sallie Mae’s How America Pays for College 2013 report, “free money” now funds 30% of college costs, up from 25% four years ago.
“Too often students wait until the spring of their senior year to start figuring out how to pay for college, and by then they’ve missed half the deadlines that year alone,” says Kantrowitz. He even adds that it’s possible to win college scholarships as early as elementary school through activities like the National Spelling Bee, community service, Doodle 4 Google, and even companies like Jif peanut butter. Or, maybe your parent’s employers offer scholarships, or you can find one related to your ethnic heritage.But don’t get too optimistic.
Only about one in eight students in four-your education programs uses a scholarship to pay for school, he says, and the average amount is $2,800 a year, which won’t cover tuition at most colleges. As for completely free rides? Those go to less than 0.3% of undergraduate students, says Kantrowitz.
3. When you have to borrow, go with federal loans before private loans.
Every year you attend school, fill out the Free Application for Federal Student Aid, or FAFSA, form. With this information, the Office of Federal Aid can help you identify federal grants, loans, and work-study funds to help you pay for school, and schools will base their financial aid packages on this form.
Federal loans offer many advantages over private loans. First, they have fixed interest rates, whereas private loans offer variable rates. Even if you find a low rate from a private lender, nothing will stop it from jumping up the next month. Additionally, having a fixed rate provides some predictability to your budget. Now, there’s even more reason to go for a federal loan: This summer, rates for subsidized and unsubsidized Stafford loans for undergraduates dropped from 6.8% to 3.68%. For graduates, rates on graduate Stafford loans and on parent PLUS loans dropped from 7.9% to, respectively, 5.41% and 6.41%. “That closes the gap between some federal and private loans — parents were seeing private loans that were lower,” says Michael Clancy, director of financial planning at Drexel University College of Medicine and a certified financial planner.
These rates apply for the life of the loan -- if rates go up next year, those rates will only apply to loans taken out next year. Federal loans also offer the advantage of a deferment period, in which the borrower doesn’t have to make payments such as when he or she is enrolled in school or unemployed. Some private loans, on the other hand, ask you to begin repaying the loans immediately. Additionally, federal loans do not require a cosigner who will be obligated to pay the loan back if you can’t, whereas most private loans do. “It’s better to not need a cosigner,” says Clancy. “But you might not get that lower rate without mom or dad signing as a cosigner.”
Overall, federal loans offer more predictability and stability. “They are cheaper, more available, and they have better repayment terms than private student loans,” says Kantrowitz.
4. Take out private loans only after you have maximized your federal loans.
If you need to take on a private loan in order to make up for any gap between your need and your financial aid package, you may be taking on too much debt. To decide whether or not it’s worth it for you, ask yourself, “Are you willing to sacrifice some of that reputation [of your first-choice school] for your second choice school, or are you willing to sacrifice your lifestyle after graduation to pay more in terms of debt to have a more expensive education?” says Kantrowitz.
It’s hard to compare private loans because they don’t do upfront pricing. “They don’t say, ‘This is the interest rate you’re going to get,’” says Kantrowitz. “You have to apply first, and then they’ll tell you what the interest rate is going to be. So, you should shop around." The lender with the lowest advertised price may not offer you your best rate.
They may offer you your worst rate. Even then, don’t get too seduced by the rate since it could rise at any time. Kantrowitz says that for a 10- or 15-year repayment term, for a variable rate for a loan issued this year, if you were to average out all the interest rates over the life of the loan, it would have an equivalent fixed rate four percentage points higher.
“So, if you have a 4% rate now, it will be the equivalent of an 8% fixed rate,” says Kantrowitz. Then, look at when you begin repayment: immediately while still in school or, preferably, six months after you graduate? Clancy also recommends finding a private loan that offers cosigner release, which is when the cosigner can be removed from the loan if the borrower has been making on-time payments. But be aware that executing a cosigner release isn’t easy — the borrower has to be making all their payments on time, and not just on student loans but on all debts.
“Lenders are aware that some parents are making payments on behalf of students until they are released from the obligation, so the last thing they want to do is release the cosigner and then have the borrower turnaround and default months later. So they not only want to make sure that the borrower is making the payments but that they have sufficient income to repay the debt,” says Kantrowitz..
5. Consider whether you will want to pursue a career in public service.
There is one instance when it’s probably okay to take on more debt than your first year’s salary. Public Service Loan Forgiveness encourages college grads to take positions in non-profit and government roles, such as public school teacher, defender or prosecutor, member of the military, policeman, fireman, or ENT, or working at any level of government, from local municipality to federal. For graduates in this program, repayment amounts are based on income, so they can afford their payments.
“As long as you work for 10 years in a nonprofit or government setting, and meet other criteria — certain loans and payment plans – you can request to have your loans forgiven after 120 qualified payments, roughly 10 years of making payments on federal loans, working at a nonprofit,” says Clancy. “Other types of loan forgiveness are specific to a government agency, like the military or the National institutes of Health — it’s almost like a recruitment bonus: ‘After a certain number of years of working for us, we’ll pay off or forgive your loans.’”
If you know that you’d like to pursue one of these careers, be sure to take out the type of loan that qualifies. But also keep in mind the risk that you may not get the job you are imagining, or you may not end up staying 10 years in that role, in which case you would not be eligible for forgiveness.
6. Use community college to supplement.
Some students consider beginning their undergraduate education at a community college and then later switching to a four-year institution. But, says Kantrowitz, one of the risks of this strategy is not graduating at all: Of those that begin college at a two-your institution, only one-fifth get a four-year degree, whereas two-thirds of those at a four-your institution do so. There are ways to utilize your local community college without enrolling full-time.
For instance, take summer classes there, making sure that the credits will transfer to your college. Look into whether you can only earn general credit or specific credit to substitute for required classes. If you decide to enroll in community college, look into your state’s articulation agreements outlining which courses apply at a four-your institution. Some agreements even stipulate any community college graduate will automatically be admitted to one of the state’s four-year public colleges, although you won’t get to choose which one.
7. Plan out your course load.
Once you know what degree you want to pursue, plan what courses you will take when from then until graduation, including all prerequisites and noting, for instance, when classes — especially requirements — are only offered once every two years. Try to take on a heavier course load each semester, or additional classes each summer, when classes may be discounted.
Some schools charge a flat rate of tuition each semester no matter how many credits you take, so by taking more credits each semester, you may be able to finish a semester early and save on tuition.Above all, try not to let four years turn into five. Don’t fail or repeat classes and try not to change majors too often.
8. Cut costs.
Live at home or live with a roommate, don’t get a car, and buy used textbooks — and then sell them at the end of the semester. Stay on your parents’ health insurance, or forgo the meal plan and instead cook your own meals. (Here are more ideas on how to keep your costs low and how to budget your money.)Then, don’t forget the various education tax benefits – American Opportunity Tax Credit, the Lifetime Learning Tax Credit or the Tuition and Fees Deduction— which give you a little bit of money back on your federal income tax return based on the amount you pay for your education. Although you won’t be able to file for these until you are enrolled, take them into account when considering your budget.