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Higher Education Loans—Tips to Minimize Debt

February 2013

College loan debt is a fact of life for many college graduates. So it’s important to manage student loan debt both to minimize how much you have to borrow and to repay the loans efficiently.

The average student loan debt for a graduate with a bachelor’s degree in the class of 2011 was $26,600, according to a survey conducted by the Institute for College Access and Success. Approximately two-thirds of students graduated with loan debt. Recent reports from the Federal Reserve estimate that total student loan debt nationally has passed 1 trillion dollars, more than current national credit card debt.

Borrowing wisely for higher education can be a wise decision, of course. That’s because getting a higher education, from technical training or an associate’s degree and on up, raises average lifetime earnings by hundreds of thousands of dollars. The downside is that too much debt can be hard to pay off and can put pressure on personal and career goals and plans. A high debt-to-income ratio, for example, can prevent young adults from qualifying for a mortgage. Paying late or defaulting can wreck individual credit for years.

Managing Student Loan Debt

Before you go to college

  • Pick potential colleges that fit your educational goals and your budget.
  • Fill out FAFSA (Free Application for Free Federal Student Aid).
  • Talk to the Financial Aid Office at schools that interest you.

While You Are in School

  • Explore work-study, part-time jobs and summer jobs before loans.
  • If you borrow, explore federally supported loans before private loans.
  • Keep track of loans.
  • Don’t stop looking for grant and scholarship opportunities for financial support.

This report’s primary focus is minimizing student loan debt after you finish school. But ideally, minimizing future debt starts before you apply to college and continues while you are in school. So we’ll give a brief overview of planning to minimize student loan debt and then concentrate on tips for paying off loans after graduation.

Managing Student Loan Debt—The Big Picture

There are many sources of income that students and their families typically use to pay for higher education. These include savings, parental contributions, grants, scholarships, work-study, part-time and summer jobs, and loans. Limiting student debt means setting a goal to make loans the last piece of your financial plan and, if possible, the least part. College finance planning is not once and done, either; it continues each year as you continue in school. Several important steps can help you make a good, working financial plan.

Before You Go to College

  • Pick potential colleges that fit your educational goals and your budget. Community colleges usually cost less than four year schools. In-state public schools are typically less expensive than private or out-of-state public schools. Which schools offer the most or broadest financial assistance to students?
  • Fill out FAFSA (Free Application for Free Federal Student Aid). Almost all schools use FAFSA to determine all financial aid offers. This means they use it in determining school grants, scholarships and other support, not just grants, work-study support, and loans that come from federal sources. Never assume that you (or your family income level) won’t qualify. Fill the form out. It’s worth the effort.
  • Talk to the Financial Aid Office at schools that interest you. Also talk to your high school guidance counseling office. Ask schools about any and all support that you may qualify for. Explore grant and scholarship opportunities that may be state or local, from an industry or corporation, or from church, civic or professional groups in your field(s) of study and interest.

While You Are in School

  • Explore work-study, part-time jobs and summer jobs before loans. By planning and spending time wisely, most students can do well in their studies and earn income to help pay part of college costs.
  • If you borrow, explore federally supported loans before private loans. Generally,
    federal loans of all kinds have lower interest rates and more flexible terms than private loans. If you need to add a private loan, compare loans from different sources. Federal regulations set a maximum interest rate, but some sources such as credit unions may offer better rates. If you need to explore private loans, BayPort Credit Union offers competitive rates.
  • Keep track of loans. When repayment of loans doesn’t start until you leave or finish school, it’s easy to forget about them. Not a good idea. Students often increase the amount they borrow with no idea of how it will increase the size (and stress) of repayment. Keep track of loan amounts and interest rate(s). Use the federal loan repayment calculator to project what monthly payments would be under various repayment options. Ask your school Financial Aid Office for help as necessary.
  • Don’t stop looking for grant and scholarship opportunities for financial support. Many schools and organizations have both merit and need-based grant and scholarship awards that are offered to enrolled students. Again, ask the Financial Aid Office.

Managing Repayment of Student Loan Debt

The pain and problems for most student loan borrowers comes after they graduate (or after they leave school without graduating). Several strategies can help you plan for repayment and avoid trouble. Trouble ranges from financial pressure to default and wrecking your credit and disrupting your life. Filing bankruptcy typically does not discharge federal student loan obligations, either.

  • Know what loans you have. Make a list of all the loans you have and their interest rates and terms of repayment. The National Student Loan Data System will identify all federal loans you have, their principal and interest, and the loan servicer. Find the latest statement or original paperwork for private loans. Your school’s Financial Aid Office may also be able to provide some records. Keep the data updated and all the paper work in one location.
  • Know when you have to start repayment on each loan. Most loans have a grace period after you leave school or graduate before you must make your first payment. Interest may or may not accumulate during this period depending on the loan.
  • Choose the repayment plan that best meets your need and employment situation. The standard repayment term for federal loans is 10 years. But there are other repayment options for borrowers who may be unemployed or making a small income. These options include borrowing for longer terms with smaller payments. They include the Income-Based Repayment plan, Pay As You Earn plan, and Income-Contingent Plan and more. Other potential benefits include loan deferment and cancellation and forgiveness. Compare repayment options on the Federal Student Aid website. Some private loans may also offer flexible terms; to find out, contact the loan servicer.
  • Stay in contact with your lender or loan servicer. Make sure you update any changes in your address or other contact information. If you have questions about repayment options or problems or inability to pay, contact these offices. Be proactive—don’t wait for confusion or trouble to mount up.
  • Pay down principal if possible. If you are able to pay down principal in additional to making monthly payments, you can decrease the interest you have to pay and shorten the term. Start with your most expensive loan. Talk to your loan servicer about the correct way to do this.
  • Consider loan consolidation for your federal loans. Consolidating multiple federal loans can give you one payment rather than many. You can also extend the term to 30 years, which may give you a lower total monthly payment but means that you will pay much more in overall interest for the loan. Some borrower benefits and flexibility of the original loans may be kept but other benefits may be lost, so a careful comparison of potential advantages and disadvantages is recommended. Most personal finance experts recommend that individuals never consolidate federal loans into a private consolidation loan because important borrower benefits such as lower loan rates and repayment flexibility are usually lost.
  • Avoid running up new debt. Graduation and a new job may tempt you to reward yourself with a new vehicle, more upscale apartment or just more entertainment, trips or clothes. Slow down. Make a budget. Prioritize. And put student loan repayment at the top of the list. Some delayed gratification now will allow you to reach your overall financial goals more quickly by minimizing student loan debt as efficiently and quickly as you can.

Enhancing a Benefit, Avoiding a Liability

Even if your student loan debt makes you groan, it’s important to remember why you borrowed: to give yourself the benefits of a higher education. The value returned on your investment can be large indeed as education enables you to pursue more career opportunities and to earn more money. Making the most of the opportunity you’ve given yourself starts with wisely managing and repaying those loans.

For More Information

Federal Student Aid is the official site that provides information about federal student loans. You can also access FAFSA from here. is an established, balanced site that provides a variety of reliable information about planning and applying for financial aid.

The Project on Student Debt an initiative of the Institute for College Access & Success provides facts and research about the problems of student loan debt and resources for solution.

More resources from GetReal

Financing Higher Education

Options for Managing Your Student Loans

Researching Scholarships

The Federal Student Aid System is Changing, How Will You Be Impacted?

Reviewed and updated August 2014.

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