• Accelerate repayment of high interest debt first. After you make the required payments on all your debts, make an extra payment on the loan with the highest after-tax interest rate. Usually this is credit card debt or private student loans.
• Alternate repayment plans include income-based repayment, where the monthly payment is based on your discretionary income, not the amount you owe, and extended repayment, where the loan term is increased from 10 years to as much as 30 years based on the total debt. Increasing the loan term on a Stafford loan from 10 years to 20 years cuts the monthly payment by a third, but more than doubles the interest paid over the life of the loan.
• If you work full-time in a public service job for 10 years and repay your federal student loans using income-based repayment, any remaining amount owed will be forgiven.
• You can also get loans canceled if you become totally and permanently disabled.
• Avoid extended periods of non-payment, as this causes the size of the loan to grow. A year of capitalized interest will increase the size of the loan by 7%, and ultimately 25% when you consider the cost of paying interest on interest.
• Use loyalty and rebate programs like Upromise to save for college. You can continue using Upromise after you graduate to help pay down your debt.
• Up to $2,500 in student loan interest on federal and private student loans can be deducted as an above-the-line exclusion from income on your federal income tax return. You can claim the deduction even if you don’t itemize.
Smart Borrowing • Do not borrow more than your expected starting salary for your entire education. If you borrow more, you will have to use an alternate repayment plan like income-based repayment or extended repayment to afford the monthly loan payments. If you borrow more than twice your starting salary you will be at high risk of default.
• If you find yourself needing to borrow more than $10,000 per year of education, you are probably overborrowing and should consider switching to a less expensive college.
• Borrow federal first, as federal education loans are cheaper, more available and have better repayment terms than private student loans. Borrow from the lowest cost loans first, such as Perkins and subsidized Stafford before unsubsidized Stafford before PLUS before Private Student Loans.
• Minimize debt. Live like a student while you are in school so you don’t have to live like a student after you graduate. Every $100 you spend with student loan money will cost you about $200 by the time you’ve paid off the loan.
• Remember this T.I.P., most colleges have tuition installment plans which let you spread out the college bill over 9 months for an up-front fee, typically less than $100. This can be a reasonable alternative to borrowing the money.
Financial Aid • Apply for financial aid even if you think you won’t qualify or even if you didn’t qualify last year. The need analysis formulas are complicated enough that it is difficult to predict whether you will qualify. Moreover, the Free Application for Federal Student Aid (FAFSA) is a prerequisite for the unsubsidized Stafford and PLUS loans, which do not depend on financial need. An estimated 2.3 million students would have qualified for the Pell Grant in 2007-08 but did not submit the FAFSA, and 1.1 million of them would have qualified for a full Pell Grant. (Two-fifths of students do not submit the FAFSA and about a quarter of these would have qualified for the Pell Grant.)
• Submit the FAFSA as soon as possible after January 1. The FAFSA is used for state grants and college grants in addition to federal student aid, and some states and colleges have very early deadlines.
• Beware of scholarship scams. If you have to pay money to get money, it’s probably a scam.
• Enroll in an in-state public college to save on tuition. If you can live at home, you can also save on room and board. Some states have regional student exchange programs which will let you enroll in a public college in a nearby state at in-state prices.
• Save on textbooks by buying them online, renting them, or selling them back to the bookstore at the end of the semester.
• Joining the military through ROTC or other recruiting programs can earn you money to pay for college or repay your student loans. Check out Fastweb’s newly launched military section.
• Search for scholarships at free web sites like Fastweb.com. When searching for scholarships, students who complete all of the optional questions tend to match twice as many scholarships as students who complete only the required questions. Start searching for scholarships as soon as possible – even students in grades K-8 can win scholarships – and continue searching after you enroll in college.
Making and Handling Money • Work part-time while you are in school. Even if you don’t qualify for Federal Work-Study, there are plenty of part-time jobs on or near college campuses. Working 10-15 hours a week will help improve your grades by forcing you to learn time management skills. Working a full-time job will hurt your performance by taking away time from academics. Enroll full-time and work part-time, not vice versa.
• Try to minimize credit card debt. Do not charge more than you can afford to pay off in full each month. Beware that spending $500 with plastic feels the same as spending $5, so it is hard to exercise restraint.
• Create a descriptive budget, where you track all of your spending each month. Just knowing how you spend your money will help you control it. Classify each expense as mandatory (need) vs. discretionary (want).
• Volunteering with AmeriCorps can help you earn up to $5,550 (the same amount as the maximum Pell Grant) to pay for school.
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