April 5, 2020
Student holding cash

Tips for Student Loan Borrowing

Funding your college education with student loans can lead to fantastic long term benefits. Here are some tips for smart borrowing so that you get the salary advantages of a degree without paying too much in student loans.

Minimize your debt.

Here’s a lifestyle tip. Live like a student while you are at college or university so you don’t have to live like a student after you graduate. Every $100 you spend using student loan money now will cost you about $200 by the time you pay off your loans.

Avoid overborrowing.

Don’t borrow more for your entire education than your expected starting salary after you graduate. A student obtaining a degree in sociology or art history will earn less and should borrow less than a student graduating with a degree in computer science or nursing.

Be realistic about your likely starting salary. Not every culinary arts graduate is going to turn into the next Emeril Lagasse, Rachel Ray, Wolfgang Puck or Bobby Flay.

If you’re borrowing more than $25,000 for an Associate’s degree, $45,000 for a Bachelor’s degree or $75,000 for a Master’s degree, you may be borrowing too much. While income-based repayment provides a safety net in case your income falls short of your expectations, keep in mind that income-based repayment is not available for private student loans or Parent PLUS loans, so the ability to accommodate excessive borrowing is limited.

If you will need to borrow excessively to pay for your education (say, more than $10,000 a year), you should consider enrolling at a less expensive college. Cumulative debt at graduation correlates strongly with the tuition rates and cost of attendance. The more expensive the school, the more debt you will accumulate by the time you graduate. You may have your heart set on your dream school, but if it means graduating with a luxury car payment worth of student loans, you will struggle to repay the debt. Your second choice college may be just as good but cost a lot less.

Pay at least the interest while you are in school, if you can.

This avoids capitalization of the interest, which increases the loan balance. This will help you pay off the loan sooner and cut the total cost of the loan.

Use Federal loans first.

There are two main types of student loans, federal and private.

You should always borrow federal first, as the federal loans are cheaper, more available and have better repayment terms. The interest rates on federal loans are fixed while the interest rates on private student loans are variable.

Federal loans will generally cost you less money over the term of the loan. The unsubsidized Stafford loan and the PLUS loans do not depend on financial need, so you don’t need to be poor to qualify for low-cost federal education loans.

Many colleges offer payment plans or tuition installment plans as an alternative to loans. These installment plans let you spread out the college costs into 9 or 12 equal monthly payments for a small up-front fee. This can be a convenient option if you can afford to pay the college bills, just not all at once.

Have a cosigner if you take out a private loan.

Private student loans are more expensive, and are mainly for filling the gap when you’ve exhausted your federal education loan limits or are ineligible for federal education loans.

Private student loans base eligibility and the interest rates on your credit score and the credit score of your cosigner. You have to have very good or excellent credit to qualify for a private student loan on your own. Most students will need a creditworthy cosigner in order to qualify. Even if you can qualify on your own, it can be worthwhile to apply with a cosigner if the cosigner has a better credit score, since this can reduce the interest rate on the loan.