Sometimes you have to borrow money to pay for college. In fact, it’s becoming the norm these days as college costs (tuition and fees) continue to rise.
One out of every 10 students who graduated from four-year colleges and universities in 2008 owed $40,000 or more in loans, according to the Institute for College Access and Success. This number continues to grow every year. That’s because Mark Kantrowitz, publisher of FinAid and FastWeb, says traditional students enter college lacking experience with personal finance.
“(A student’s) main focus is on pursuing their dream, and they’ll sign what ever piece of paper they put in front of them,” he says. “Most think they’ll figure out the financial end of things after they graduate,” he adds.
But Kantrowitz says that’s too late. The sooner you start thinking about ways to reduce or eliminate debt, the better off you’ll be when you enter the real world.
“The idea is to pay off your debt as quickly as you can—in order to make that possible you have to keep your debt at a reasonable rate,” Kantrowitz says.
Patricia Nash Christel, managing director, corporate communications at Sallie Mae, says how much to borrow is definitely a personal choice, but it should be an informed decision.
Here are some ways to ensure you don’t graduate with mountains of debt you can’t afford:
Get all the free money you can
OK, before you even start thinking about borrowing, be sure you are getting all the free money you can. Every dollar you win in a scholarship is a dollar less you have to borrow for tuition and fees.
So don’t forget to complete the FAFSA at fafsa.ed.gov. This will ensure you’ve applied for federal and state grants as well as school grant and scholarship opportunities.
Plus, start searching for scholarships as soon as possible, the more you apply to the more you will save.
First, find out how much you really need. What resources do you have available to you? Can you even afford the tuition at the college or university you are considering?
If you have to borrow—don’t borrow excessively. Sure, you’ve heard that education debt is good debt. Problem is, too much of a good thing can be harmful.
And be sure to start with a federal loan, Christel adds. These loans are available regardless of income, so they don’t require credit history checks. Loan amounts are limited and have a maximum borrowing limit. But don’t treat the loan limits as targets. Just because they offer it, doesn’t mean you need to borrow the max.
If you still need additional funds to pay for college after a federal loan, consider a responsible, private education loan to make up the difference.
“Live like a student while you’re in school, so you don’t have to live like a student when you graduate,” Kantrowitz says. “It’s the little things that add up,” he says. That’s why Kantrowitz encourages keeping a descriptive budget that tracks your spending for a month. Then figure out what is a necessity and what is discretionary.
Plus, don’t forget why some financial institution loaned you that money in the first place. It’s supposed to be for education. The school certifies the amount you are able to borrow, so you shouldn’t be borrowing more than you need. However, if you find that you overestimated on the budget or something changed with your financial situation, you can and should use the refund to immediately pay back the interest of the loan, Christel says.
If you use that money on daily expenses, you’re making a big mistake. Consider this: Say you buy a $10 pizza every week. That’s more than $500 a year on pizza (or substitute your favorite snack or fancy coffee drink). If you do that for four years, you’ll have spent $2,000 on pizza. And if you used your loan money to pay for that pizza, you will end up spending about $4,000 over the lifetime of the loan.
Instead, find simple ways to cut corners with discretionary spending. You’ll save a ton and have more money to spend when you join the working world.
Consider how you’re going to pay back the debt
Typically college debt will be about four times as much as you borrow your first year. So be sure to factor in your income expectations after graduation. See an estimate of what your typical monthly payment will cost and what salary you would need to make to afford your loan.
Take advantage of free online budgeting programs, such as Sallie Mae’s Education Investment Planner, which can estimate how much a typical monthly loan payment will cost you.
Christel says if your loan payments are 10 percent or less of your monthly income, the bill is likely to be manageable. Kantrowitz says it shouldn’t be more than half of your starting salary once you graduate. Either way, you need to know what to expect so you are prepared come graduation for that first loan bill.
You don’t have to wait until you graduate to start paying off debt. Christel says you can get a personal private loan through Sallie Mae’s smart option student loan that offers options for monthly interest payments or even small flat payments while you’re still in school. You could reduce the total interest paid by up to 50 percent by getting started early, Christel says. “It does make a huge difference over the life of a loan.”
On the other hand, deferring the loan after graduation can definitely add up, Kantrowitz warns. If you defer the loan and then extend the life of the loan to keep your monthly costs down, it could double and even triple your costs. For instance, if you extended a loan at 6.8 percent interest from a 10-year payment plan to a 20-year payment plan, your monthly payment would decrease by 1/3, but the cost of the loan would double.
If you can’t pay your loans, Kantrowitz says it can ruin your financial life. Collectors can garnish your pay, take your income tax refunds and the mark on your credit history will make it next to impossible to buy a home or finance a car.
So ask yourself these questions early on, because once you’ve graduated there’s not much that can be done with your debt.
“The debt will get into the way of you pursing your dreams,” Kantrowitz says.
Enid Arbelo Bryant is a freelance writer in Rochester, New York.