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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

Consider enrolling at a college with a “no loans” financial aid policy.

More than six dozen of the most selective colleges have adopted generous financial aid policies where they replace loans with grants in the need-based financial aid package. Students can still borrow to pay their share of college costs, but they usually graduate with much less debt. The bottom line cost at these colleges is often lower than at many in-state public colleges.

Compare colleges based on the out-of-pocket cost.

The out-of-pocket cost is the difference between the total cost of attendance and the gift aid, such as grants, scholarships, tuition waivers and other money that does not need to be repaid. It is a better measure of your bottom line cost, the amount of money you will need to earn, pay or borrow to cover college costs. Think of it as a discounted sticker price. Debt at graduation correlates very strongly with a college’s out-of-pocket costs.

Live at home with your parents.

It’s better to live at home while you are in school by choice than to be forced to live at home after you graduate.

When it comes to paying off debt, you need all the help you can get. Check out more expert advice.

Students who live at home with their parents graduate with less debt than students who live on or off campus. Among students graduating with Bachelor’s degrees from public colleges in 2007-08, 51.5% graduated with student loans and the average debt at graduation was $16,870. This compares with 63.1% and $20,718 for students who lived on or off campus. (Living off campus may not save any money, unless you split the costs with a roommate. Among students graduating from public colleges in 2007-08, 64.0% of those living off campus graduated with an average of $21,093 in debt, compared with 58.8% and $18,798 for students living on campus.)

These statistics apply only to students enrolling at public colleges. The cost differences for students living at home or on/off campus are much lower at non-profit and for-profit colleges.

There are a few drawbacks to living at home with your parents. You will lose out on some aspects of college life, such as studying for tests and working on assignments with other students. It may be more difficult to study at home. You will also have to pay for transportation and parking costs. Commuting also takes time.

Borrow federal first.

Federal student loans are cheaper, more available and have better repayment terms than private student loans. The interest rates on federal education loans are fixed, while the interest rates on most private student loans are variable and will probably increase over the life of the loan.

Pay attention before signing any promissory note. Read the fine print. Ask about interest rates, fees, how the interest rate may change, the monthly payments, total interest and total payments.

Federal student loans offer income-based repayment and public service loan forgiveness as options. Private student loans do not. If you are interested in pursuing a career in public service, income-based repayment can reduce your monthly payments to affordable levels while public service loan forgiveness cancels any remaining debt (including accrued but unpaid interest) after 10 years of full-time employment in a public service job. Public service jobs include working in a variety of occupations and for a variety of employers, including police, fire, EMT, military, government (at the local, state or federal level), public interest law, public defender, prosecutor, teaching in the public schools, public librarian and working for a tax-exempt charitable organization.

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