Congratulations. You got into college and start in the fall. Now comes a bitter dose of reality. Perhaps the value of your parents' college savings has tanked and maybe the home equity loan they'd been counting on to cover tuition didn't go through and the summer job you thought was in the bag didn't materialize after all.
Whatever the reason, millions of students rely on student loans to pay for some or all of college. In total, two out of three leave college with student debt. The average: A sobering $22,700 per graduate. (At least they have a degree to show for it; half the students who enter college never graduate, though many are still on the hook for student debt.)
Often, it takes these newly minted graduates one to three decades to pay it off. Given how much, and how long, the commitment is, it pays to know what you're getting--and whether it's the best deal going--before you sign any loan papers.
There are important distinctions between federal and private student loans, but they have one thing in common: neither is likely to be forgiven if you have to file for bankruptcy, making them lasting financial commitments. Unless, of course, you pay them off.
Before you take out a loan, throw aside the cliché that "college always pays" and ask yourself some tough questions. Will salaries in your desired field of study allow you repay the loan?
Put away the rose-colored glasses too. While every law student dreams of making $175,000 as a first-year associate, the reality is that very few earn those eye-popping salaries. Let a large salary be a pleasant surprise, rather than a requirement to pay off debt.
Research the average pay of the field you've chosen by going to the Bureau of Labor Statistics, a federal office that publishes the Occupational Outlook Handbook. Here, you'll find information on projected earnings, expected growth rates and typical work environments for most occupations.
Next, ask potential lenders for monthly loan repayment estimates in writing. It makes little sense to take out $100,000 in student loans to go into a field where you will be making $20,000 a year.
To make sure that you're not getting in over your head, limit the total amount of student debt you take on to the salary that you expect to make the first year out of college. That way, your monthly payments will likely be less than 10% of your take-home salary.
The right choices can save you thousands of dollars from the loans. |
What to do if the numbers don't add up? See if there are other ways to finance some or all of your education. The first, and best, way is to limit what you pay in the first place. That means searching for scholarships and grants that may reduce the costs of college. The federal government lists grants (which do not have to be repaid) at studentaid.ed.gov. Private Web sites, such as FinAid, FastWeb and NextStudent, list scholarships.
Once you've minimized how much you'll have to borrow, it's important to keep in mind that there are two main types of student loans: those backed by the federal government and those issued by banks and other private lenders. In almost all cases, federal loans are the better deal for student borrowers.
One key difference between federal and student loans is how they charge interest. All federal loans written after July of 2006 have a fixed-interest rate, which means that the rate that you are quoted will not change for the lifetime of the loan. Private loans, in contrast, typically carry variable interest rates, meaning that they often reset every quarter based upon the interest rates that banks pay each other. Lenders will then add a percentage on top of this baseline rate to your monthly payment. There is no legal limit to the interest rate that private lenders can charge you.
The average private loan currently carries an interest rate of 12%, which is about double what federal loans charge, Kantrowitz says. Though both federal and private loans accrue interest while you are in school, you generally won't have to begin making payments until six months after you graduate.
The best bet? Don't let your enthusiasm for college overwhelm you. Instead, be methodical and have your parent or trusted adviser read over everything and render a second opinion. read more...
Sources:
David K. Randall from Forbes.com
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