Best Student Loan Tips
On July 1st this year, banks and other financial institutions raised student loan interest rates by 0.8 percentage points. These rates would apply for the academic year that commences this fall. The revised student loan rates for the coming academic year are:
- For Undergraduates: 4.66 percent (up from 3.86 percent last year)
- For Graduates (Stafford loans): 6.21 percent (up from 5.41 percent last year) and,
- For PLUS loans: 7.21 percent (up from 6.41 percent last year)
Clearly, higher education comes at a significant cost.
Loan-ly Figures: The Numbers Behind Student Loans
Last year, Congress voted for tying student loan interest rates with the market rates. Previously, Congress determined interest rates for student loans, regardless of what borrowers paid for other loans. As a result, student loan interest rates would continue to see annual increases.
The new rates could seem like bad news if you were planning to attend college this year. While you might have planned on taking out loans to fund your education, any rise in interest rates has repercussions over the lifetime of the loan. According to this infographic from the Wall Street Journal:
v In 2014, about 70 percent of undergraduate students had student loans (up from 64 percent in 2004)
v The average loan amount taken out by undergraduates in 2014 amounted to $33,000 (up from $18,600 in 2004) and,
v As of March 2014, the total amount of US student loan debt amounted to $1.2 trillion (up from $400 billion in March 2004)
Despite the increase, the new interest rates might not be too burdensome for most students. Estimates show that new borrowers would pay about $4 more each month for every $10,000 that they take in loans, over a 10-year repayment term.
Look Before You Leap: 8 Steps for Taking Out a Student Loan
Here are eight tips for making your loan less burdensome.
- Never accept the entire amount of a loan you’re offered. Get a realistic idea of the amount you need to borrow by considering:
- Your cost of living
- The cost of attending college
- Your family’s contribution and,
- Your financial aid award
- Avoid taking loans that are greater than your first year’s salary. Ideally, your total debt must be significantly lower than your expected starting salary. This would enable you to repay your loan faster. Therefore, determine your total debt for all years of college. Multiply your first-year loan by the duration (in years) of your program. Compare this figure with the current salary offered by the job you plan to take on graduating. You could obtain these details from websites like salary.com or payscale.com. If your total debt exceeds your estimated starting salary, do not take the loan. Also, ensure that your monthly payment remains from eight to 10 percent of your monthly salary.
- Check whether you’re eligible for grants and scholarships. Consider checking this when you commence your senior year in school.
- Prioritize federal loans over private loans. Consider filling the Free Application for Federal Student Aid each year you attend school. Based on the information you provide, the Office of Federal Aid could help you identify federal grants and loans to help you pay for school. Federal loans have fixed interest rates, unlike private loans. Hence, they would keep your budget stable for the lifetime of the loan. Federal loans also offer the benefit of a deferment period. The deferment period authorizes you from repaying the loan when you’re studying or unemployed.
- Understand the terms and conditions of the loan you’re taking. This includes asking questions about and ascertaining details like:
- The total cost of the loan
- The amount you need to pay each month
- Whether your interest rate is fixed or variable
- Whether you could obtain a lower interest rate
- The fees and fines that the lender could levy
- Plan – and monitor – your course-load. When you commence college, plan your timetable for courses you would take from then until the day you graduate. Take on a heavier course-load each semester. Or, take an additional class in summer to enjoy discounted rates. In addition, ensure that you avoid repeating classes so that you can graduate within four years, instead of five or more.
- Take up a part-time job. A part-time job could help you in several ways. Not only would it give you valuable “real world” experience. It would also help you meet your living expenses. In addition, it may help you to build up a savings corpus of your own for repaying the loan or for dealing with emergencies. In fact, you could chip away at your debt by making payments while you’re in college as well.
- Curtail your expenses. Live as frugally as possible. For example, cook your own meals instead of eating out. Avoid purchasing a car and use public transport. A penny saved is a penny earned, after all.
Taking a student loan might be easy these days. However, remember that repaying it would involve several years of your professional life. Every dollar you borrow today would mean at least two dollars less for things you want to purchase when you start working. This could range from buying a house or your own vehicle. Therefore, don’t take on the burden of a loan without understanding the repercussions of your decision today.
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