Getting Smart With Student Loans

A few days ago we talked about the  importance of grants and scholarships to financing a college education. But few students get a full ride, and most end up taking out loans at some point. So today we’ll provide some guidance about how to handle student loans as painlessly as possible.

Only once your family has exhausted all grant and scholarship options should you and your kid look into loans. While some options are certainly better than others, all loans involve paying back the money borrowed after graduation. There are two main choices: (1) federal and state loans, and (2) private and home equity line of credit (HELOC) loans.  Always take a federal or state loan before taking out a private loan. Federal loans have significantly lower interest rates compared to private loans, and some state loans are even interest-free. The two most common types of federal loans are Perkins loans and Stafford loans.

Private and HELOC loans can be a much more risky way to borrow money if not done carefully. Private loan companies will entice you or your kid to borrow from them by allowing you to borrow a large amount at once, and will let you borrow more than you can afford.  But the interest rates on these loans are not fixed and have no maximum. If you borrow from a private lender, be sure to keep track of the amount borrowed, the interest rate, and the interest accrued as time progresses. Throughout college, students have the option to pay off the interest that has accrued and, if your kid can afford it, this is a good way to reduce the amount ultimately due after graduation. Interest payments made on education loans are tax deductible.

As a parent, you can use a HELOC loan to fund a college education as well. This is an open-ended loan paid as a revolving debt that’s backed by one’s home equity. It usually has a lower interest rate than private loans and interest paid is also tax deductible.

Things to Keep in Mind

Students are not required to start paying back student loans as long as they maintain their full-time student status. But if they switch to part-time status or take time off from school, payments will be due. So before taking out a significant amount of money in loans, students should always be sure that they will finish school. Or, if they’re considering taking some time off, be sure that they’ll be able to afford loan payments.

When borrowing money, students should keep in mind the kind of degree they’re going to school for. Your kid should try to estimate what the starting salary for their degree will be after graduation and be sure that they can afford to borrow this amount ( or are useful resources for this). Also remember that the average starting salary for degrees is no guarantee of income; recent graduates may have trouble finding a job at first, or  might need to take a job that pays less.

Most loans have a grace period after graduation, during which monthly payments are not due (but interest will accrue). This amount of time can vary, so make sure your kid knows how long this is for their  loans. Your recent grad should make payments during this grace period if they can afford it.  This will reduce monthly payments in the future and reduce the overall amount of interest paid.

More tips on how to balance college financing successfully:

10 Things Financial Aid Offices Won’t Say

Paying for College Without Loans, Scholarships or Looting Your Parents’ Retirement

The College Board