If you’re thinking about college, then you’re probably also thinking about money – or, more to the point, costs.
How much will college cost? Can you afford to attend? How much financial aid will you get? How much of that aid will be student loans you need to repay in the future?
The quick answer to all of those questions is “it depends.” Your tuition depends on what kind of college you attend. Your financial aid depends on your family’s financial need, which also affects the loans included into your aid offer.
Most students will need at least some loans to help them get through school. Statistics say about 70% of new graduates have outstanding loans to pay back. The trick, then, is to use loans sparingly and keep an eye on how much your total debt will be at graduation. You don’t want to take out too many loans and have your future plans strangled because you’re struggling to keep up with the payments.
Start by looking ahead
First, think about your potential career path and what kind of starting salary you can expect in your chosen field.
If you aren’t sure what you want to do, spend some time in your college’s Career Services office. They offer all kinds of career interest evaluations to help you map out your plans.
They typically maintain a collection of career salary information for you to review. You can also visit sites like www.payscale.com to see salaries in specific fields. Use the lower end of the possible salary range for your calculations.
Limit Borrowing to One Year’s Salary
Once you estimate what your first job’s salary might look like, use that as your target total loan amount.
The experts say that limiting your student loans to your first year’s salary puts you on track to pay off your loans within ten years. That 10-year goal isn’t an unbreakable rule, but it’s very sound financial advice.
The longer it takes to pay off your loans, the more interest you’ll pay and the less flexibility you’ll have to get things like a new car, a nicer apartment, vacations, or even a house of your own.
Estimating Your Payments
The federal government offers a free loan repayment estimator through the Department of Education’s Federal Student Aid web site. Every semester, you should check the estimator to see what your after-graduation payments will be based on the loans you borrowed so far.
When you do that, leave the “prospective salary” amount in the calculator blank, because that makes the calculator give you a simple estimate. If you enter an expected salary, the estimator tries to apply the loan program’s current income-based repayment rules to your payment. Unfortunately, rules change over time, so the discount that the site shows today might not be there once you graduate.
In your estimator results, look at both the 10-year repayment amount and the extended repayment options. If the numbers seem too high based on your expected first-year salary, then it’s time consider borrowing less and either applying for more scholarships or picking up a part-time job.
Go for Federal Loans instead of Private Ones
Student loans come in two basic types: Federal loans through the government and private loans through banks.
Federal loans typically give you lower interest rates than private student loans, which means you’ll pay less interest over time. Interest rates for undergraduate federal loans range between 3.4% and 6.8%.
Since the federal government limits the total you can borrow, you might have to also use private loans from your local bank. Be careful when you look at this option, because interest rates can creep much higher for private loans than government loans. Since the loan comes from a bank, you might also need your parents to co-sign for you.
The federal government also offers more borrower protections for you than private banks do. In the future, you might even qualify for federal loan forgiveness or income-driven repayment plans.
Learn More with This Free Guide
Want even more information about college loans? Smart move! Click below to get a free copy of our Student Loans Quick Guide. It explains how different programs work, what questions you should ask, and how to plan today for a safe financial future.