10 Strategies for Keeping College Debt Manageable

It may be necessary to borrow in order to go to a college that’s a good fit. But making smart and disciplined decisions can help keep your student’s college debt from becoming an unaffordable monster. Here are some strategies for doing that . . .

(1)  Make Those Dollars Stretch: Your student needs a plan to guide his or her spending at school. Tuition, fees, and on-campus room and board will be deducted from financial aid at the beginning of each semester. Then remainder has to pay for books, transportation, and personal expenses for the rest of the semester. Making and sticking to a spending plan can help your student avoid running out of money before the semester ends — at which point the only type of aid that’s left is likely to be loans.

(2)  Get a Job: You may worry about your student working, especially while adjusting to the rigor of college during the freshman year. But research shows that undergraduates who work 10-14 hours per week average higher GPAs and lower drop-out rates than those who don’t work at all. Working helps your student earn money to limit borrowing, gain resume-enhancing employment experience, and generate future references for graduate school and job applications.

(3)  Borrow Only What’s Absolutely Necessary. There’s an old saying, “The student who borrows to live like a professional before graduation will have to live like a student after graduation!” If his or her spending plan indicates your student can cut back on borrowing, urge him or her to do so.

(4)  Don’t Borrow It Just Because It’s Offered. That’s right. No rule requires your student to accept any loan funds that are offered. In fact, most financial aid award letters provide ways to wholly or partially reject loan awards. If your student accepts loan funds on the award letter but then figures out they’re not needed, he or she should contact the aid office to reject them. If your student ends up needing some of those rejected funds later, he or she can go to the aid office and have his or her Federal Direct Loans reinstated.

(5)  Borrow from Uncle Sam First. The U.S government provides $9 out of every $10 student loan dollars. Why? Because federal loans are just better than other student loans. Unlike private loans, interest rates on federal loan are fixed, so interest on them will never rise. They offer six different repayment plans — including plans limiting monthly payments to a percentage of after-college income — and borrowers may switch plans whenever they need. Borrowers can lower their monthly payments by stretching out their repayment periods and, if they suffer short-term economic problems, they can postpone their monthly payment obligations. Federal loans also have generous forgiveness programs.

(6)  Minimize “Unsubsidized” Student Loan Borrowing. Even within the federal programs, some loans are better than others. Federal Direct Subsidized Loans and Federal Direct Unsubsidized Loans have the same interest rate, but subsidized loans will cost your student much less than unsubsidized loans. How? Interest doesn’t accumulate on a subsidized loan until your student has been out of school for 6 continuous months — i.e. the “grace period.” Conversely, unsubsidized loan interest begins accumulating the day loan funds are disbursed (applied to tuition and fees or transferred to your student). No payments will be required until the grace period ends, but then outstanding interest gets added to loan principal, and interest begins accumulating on an inflated principal amount.

(7)  Prepay It. If your student can ever afford to make a payment while in school, even a small one, it’ll reduce what he or she will pay later. Better still, repaying Federal Direct Loan funds within 120 days of disbursement causes the government to cancel any interest and loan fees that accumulated on the amount repaid. The financial aid office can tell your student how to make such a payment.

(8)  Don’t Save Unsubsidized Dollars for Next Year. At the end of each academic year, some students bank the loan dollars they received but didn’t use. Bad idea! This is especially true for unsubsidized loans which, at today’s rates, accumulate interest at 4.29% per year. Paying over 4% for funds on which a savings account will yield 1% to 1.25% is a lousy investment strategy and, remember, your student can get new loans next academic year. One exception: using leftover loan funds to cover tuition and books for summer school courses at the local community college. The community college must considerer your student as a “transient student” while completing such courses, but your student will likely be able to transfer them back to his or her university — thereby accelerating time-to-degree.

(9)  Graduate. Remember, the holder of a bachelor’s degree averages earnings of $964 thousand more in a lifetime than the average person who gets a high school diploma. The extra earning power a degree brings can go a long way toward making your student’s college loan payments more manageable. If your student drops out without a degree, he or she’ll miss out on this earnings boost, not to mention all the other benefits that go with college completion.

(10)  And Don’t Dawdle Along the Way to Commencement. Accelerating time-to-degree can be a real money saver. One major university recently found that its undergraduates who earned their degrees within four years averaged 35% less debt than those who earned degrees in five years, and 51% less debt than those who did so in six years. So urge your student to get that degree as soon as possible.

College Affordability Solutions has educated thousands of Americans on the ins and outs of student loans. Call (512) 366-5354 or email collegeafford@gmail.com if you need help.

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