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How to Minimize Student Loan Debt

How to Minimize Student Loan Debt

More students graduate each year with excessive student loan debt.

Mark Kantrowitz

April 12, 2011

This article discusses the need to minimize student loan debt and provides more than a dozen practical tips on ways to reduce borrowing for college costs.

Try to avoid overborrowing for your college education. Do not treat loan limits as targets. A good rule of thumb is that your total education debt for your entire college education should be less than your expected starting salary after you graduate. Ideally your student loan debt should be less than half your expected starting salary. Other signs of over-borrowing include borrowing more than $10,000 for each year in school or needing to borrow private student loans.

If you borrow more than your expected starting salary, you’ll have to repay your loans with an alternate repayment plan like extended repayment or income-based repayment instead of standard 10-year repayment. These repayment plans reduce the monthly payments to more affordable levels by increasing the term of the loan, but this also significantly increases the cost of the loan. For example, switching a Federal Unsubsidized Stafford loan from a 10-year term to a 20-year term will cut the monthly payments by about a third, but it will also increase the total interest paid over the life of the loan by a factor of 2.2. That’s more than double the total interest. A longer repayment term will reduce the monthly payments, but do you really want to still be repaying your own student loans when your children enroll in college?

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If you borrow more than twice your expected starting salary, you will be at high risk of defaulting on your debt. You can’t get away from this debt, as the federal government has very strong powers to compel repayment. The federal government can garnish up to 15% of your wages and intercept your income tax refunds without a court order. They can even garnish Social Security benefits. A student loan default on your credit history will make it more difficult to get credit cards, auto loans, home mortgages. It can even affect your ability to get a job or rent an apartment. Student loans are almost impossible to discharge in bankruptcy. A successful discharge requires demonstrating undue hardship in an adversary proceeding, a very harsh standard. Of roughly 72,000 borrowers in bankruptcy in 2008, only 29 had all or part of their federal student loans discharged. That’s 0.04%. You are more likely to get cancer or die in a car crash than to have your student loans discharged in bankruptcy.

Education debt can also have a big impact on your lifestyle after graduation. Students who graduate with no debt are almost twice as likely to go on to graduate and professional school as students who graduate with some debt. Student loans also affect career choices. An extra $10,000 in debt corresponds to a 5% to 6% decrease in the likelihood of a college graduate pursuing a public service career. Students who graduate with excessive debt or who default on their loans are more likely to be depressed. They often delay getting married, having children, buying a car and buying a home. Borrowing excessively can be like having a mortgage without owning a home. The debt may make it more difficult to save for retirement or your own children’s college educations. Live like a student while you are in school so you don’t have to live like a student after you graduate.

So how do you minimize your student loan debt?

Here are several tips on ways to reduce the need to borrow for college costs and cut the cost of borrowing.

Save before enrolling in college.

It is literally cheaper to save than to borrow. Every dollar saved is a dollar less you will have to borrow. If you save $200 a month at 6.8% interest for 10 years, you will accumulate about $34,433. If instead of saving this money, you were to borrow it at 6.8% interest, you will pay $396 a month for 10 years, almost twice as much. The difference is that when you save, you earn the interest, while when you borrow, you pay the interest.

Search for scholarships on free scholarship-matching sites like Fastweb.

Every dollar you win in scholarships is about a dollar less you have to borrow. You can win scholarships even after you’ve already enrolled in college, not just in high school and the earlier grades. Ask each college about its outside scholarship policy. Most colleges will reduce the need-based aid package by the amount of the private scholarships you win. But some colleges will reduce the loans first, letting you save money by substituting scholarships for debt.


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