How to Minimize Student Loan Debt
More students graduate each year with excessive student loan debt.
April 12, 2011
Before buying something with student loan money, ask yourself whether you’d still buy it at twice the price.
Every dollar you spend will cost you about two dollars by the time you pay back the loan, given typical interest rates and repayment terms. Suddenly, that $10 pizza doesn’t seem as attractive at $20. Plus, spending $10 a week on food or entertainment will cost you $2,000 by the time you graduate. The $4 daily specialized coffees or juice drinks add up to $4,000 over 4 years.
Better yet, sell off extraneous possessions on eBay or other auction sites to raise money to pay college bills. You’re in college to get an education, not to collect a lot of tchotchkes and gadgets. If you economize while you’re in college, you’ll be able to buy better stuff after you graduate.
Pay the interest on unsubsidized loans during the in-school and grace periods to prevent the loan balance from growing larger.
Most student loans allow borrowers to defer repaying the loans during the in-school and grace periods. If the borrower does not pay the interest at it accrues, the interest is capitalized (added to the loan balance). This is a form of negative amortization. It can increase the loan balance by 15% to 20% by the time the borrower enters repayment.
Both federal and private student loans do not have prepayment penalties, so nothing prevents you from paying the interest during the in-school period. Just send an extra check to the lender in a separate envelope with your loan id number on the check and a coverletter asking the lender to apply the check to the loan balance. If you can’t afford to pay the full amount of interest, try to pay something, as this will save you money in the long term.
Some lenders will give you a lower interest rate or other discounts if you agree to make payments during the in-school period.
Work part-time during the school year and full-time during the summer to earn money for college.
Working 10-15 hours a week during the semester helps academic performance by forcing you to learn time management skills. Working more than 15 hours a week, however, will take too much time away from academics. Students can earn up to $5,250 in 2011-12 and $6,000 in 2012-13 before the income affects their eligibility for need-based financial aid. Aid eligibility is reduced by half of after-tax income above these income protection allowances. The more you earn, the less you will have to borrow.
Graduate with a Bachelor’s degree in four years, not five or six.
Graduating on time can save you an extra year or two of college costs. Take a full course load or even an extra class if you can handle it. Plan out your path to the degree, to ensure that you take the prerequisites as soon as possible. Students can run into trouble when a class they need isn’t offered every year. Take AP classes in high school and advanced standing exams in college to get college credits quicker.
Don’t switch majors or transfer colleges.
Students who change course mid-stream take much longer to graduate and graduate with more debt. Among students who first enrolled in college in 2003-04, those who changed majors took an extra semester or two to graduate and graduated with about $1,600 more debt. Students who transferred graduated with about $3,400 more debt.
If you will be pursuing a lower-paying field of study like art, humanities or sociology, consider double-majoring to get a second degree in a more lucrative field of study. Art students should pick up a useful skill like web page design. That way you will be able to pay the rent and repay your student loans while pursuing your dreams on the side.
After you graduate, accelerate repayment of the highest cost loan first.
Make the required payments on all your loans, but use extra money to prepay the highest cost loan. The highest cost loan is the loan with the highest interest rate. This will save you money by reducing the total interest you will pay over the life of the loan. Credit cards and private student loans usually have the highest interest rates.