For many university-bound students, credit is simply a required part of their studies. They are often seen as a necessary tool for entering college that could open up career prospects and lead to increased income, which is why about two-thirds of bachelor’s graduates graduate with student debt.
But just because millions of students borrow each year doesn’t mean you should borrow blindly. It’s one way to get trapped with debt you can’t actually afford.
Whether you’re just applying to college or are a current student who needs more money to pay this semester’s bills, here’s how to make sure you’re managing your credit (and maybe even reducing your debt be able).
Choose an affordable school
The college you attend can have a significant impact on how much debt you take home. For many students, a state public college is the cheapest option. And on average, graduates from public colleges have less debt than students who attend private colleges, about $26,900 versus $31,450, according to the Institute for College Access & Success.
But that is not true in every case. When deciding where to apply, pay attention to research schools’ policies on financial aid: do they award most of their aid based on financial need, or do they have some merit-based grants? Would you qualify for either of the two? Then get a customized estimate by entering your family’s financial information into each college’s net rate calculator.
Don’t overlook factors like whether you could live at home and commute to save money, or whether the college is in an expensive metro area where rent (and room and board) are likely to be higher. Of the 25 colleges with the highest published room and board prices, 19 are in New York City, Boston or San Francisco, according to the Department of Education.
Consider out-of-the-box solutions
If you’re flexible about where you attend, you may be able to use some out-of-the-box strategies to reduce your out-of-pocket expenses. An option? Find (and be hired by) an employer who will help foot the bill. In 2018, about half of employers offered student grants to employees, according to a survey by Gesellschaft für Personalmanagement. The details of the benefit – including the amount of money that can be paid – vary by employer. Note, however, that some companies may require that you agree to remain as an employee for a specific length of time, only earn certain types of degrees, or attend a specific college.
If you’re willing to work in another capacity, consider applying to a “work college,” where all students on campus work an average of 8 to 15 hours a week in exchange for reduced tuition, according to the Work Colleges Consortium. Some colleges, such as Wichita State University and the University of Kentucky, offer legacy discounts, where you receive a reduced tuition price if a parent or grandparent attended. If your parent works at a college, you can also get a significant tuition reduction, not only at the institution where your parents work but at other colleges as well. Tuition Exchange, a consortium of more than 600 colleges, offers one-to-one scholarship opportunities to the children of eligible faculty and staff.
Apply for scholarships
Getting a full scholarship to college is very difficult, but that doesn’t mean it’s impossible to get multiple smaller scholarships to reduce borrowing. According to Savingforcollege.com, $7.4 billion in private scholarships and grants are awarded to undergraduate students each year. Several national grant searches are available, including the US Department of Labor grant search and the mobile-optimized Scholly grant search engine. You can also look for localized scholarships at your college’s financial aid office or at nearby community organizations. And don’t overlook professional organizations based on your major.
Remember: Don’t wait until your freshman year to apply. Deadlines and qualifications vary. In fact, some scholarships are only open to students who are further along in their college path.
Complete the FAFSA
The Free Application for Federal Student Aid, better known as FAFSA, is your ticket to qualifying for federal scholarships, which are free money you don’t have to pay back. Your FAFSA application also determines if you are eligible for work-study positions, which are government-funded on-campus jobs, and the application allows you to borrow federal loans, which have better terms than private loans. (More on that below.)
Finally, the FAFSA is also required for many government scholarship programs, and even some outside scholarship organizations that are not affiliated with the government require it. Just like with scholarships, it is not too late to fill out the form if you have not already done so. You have until the end of this academic year to complete the FAFSA for this year’s funding.
Understand how student loans work
If you understand how the loans work before you take out a loan, you won’t be in for any surprises later. First off, be aware that just because you’re offered federal student loans in your financial aid package doesn’t mean you have to take advantage of them or accept the full amount offered to you. On the other hand, if you initially turned down some of the federal loans you were offered for that academic year but now find you need them, talk to your financial aid office about accessing the remaining loans.
For federal loans, interest rates are fixed, meaning the interest rate stays the same until you pay off your loan. The prices are fixed every year; The current interest rate for undergraduate borrowers is 2.75%, while it is 4.30% and 5.30% for graduate and parent loans. Interest rates on personal loans are typically higher than federal loans unless you have an excellent credit history, and interest rates can be either fixed or variable. A variable interest rate changes over time, rising or falling depending on economic conditions.
Unless you have a subsidized federal loan, interest accrues as soon as you take out the loan, meaning your loans will grow throughout your school years unless you take steps to pay back the monthly interest. When you make a payment (whether you’re enrolled or out of school), the money is first used to cover accrued interest, then the remaining amount goes toward the principal.
If you need to pause your repayment for any reason, interest can be activated. This means that the unpaid interest is then added to your principal balance, increasing the amount on which your future interest is based.
Consider your future earning potential
If you Student loans are manageable depends in large part on how much you earn. A graphic designer making $52,000 a year may have a harder time paying off $50,000 in debt than an engineer making nearly $100,000. That means it’s wise to have an idea of your future earning potential before you start taking on debt. Mark Kantrowitz, publisher at Savingforcollege.com, recommends borrowing no more than the expected first year’s salary. Otherwise, you might struggle to afford your monthly payments. You can find salary predictions on sites like Salary.com or Glassdoor, or by searching job boards for similar opportunities you’ll be looking for when you graduate.
Know the difference between government and private student loans
There are big differences between state and private student loans. Federal loans offer benefits that private loans don’t—including loan forgiveness opportunities, income-based repayment plans, and more options to defer loans if you lose your job or are financially troubled. Federal loans also offer some need-based subsidized loans where interest is paid during the deferral.
Because of the flexible payment options and other benefits that come with federal loans, most experts recommend sticking with them and avoiding private loans altogether. Still, about 5% of college students used private loans in 2015, according to The Institute for College Access and Success.
Once you’ve decided that a personal loan is right for you, don’t just subscribe to the first offer that comes along. There are many things to consider, including the interest rate, the loan terms available, and the lender’s ratings and reputation. You can also research which lenders offer options to pause or lower your payment during a financial crisis, or which lenders offer co-signer release if that’s important to you.
Consider your co-signer carefully
Most private lenders require a co-signer since the majority of students have limited or no credit history or income. If that’s the case, you need to ask a responsible relative with a steady income and good credit. You should also understand what you are asking your co-signer to do. They’re stuck with your loan when you can’t pay, and that loan is hanging around on their credit report, making it harder to buy or refinance a home.
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