Settle on student loan total before borrowing
There is such a crazed desire for larger student loans, but parents and students can avoid taking on too much debt if they just use their heads.
When they’re weighing a student loan for freshman year or even the amount of debt that they’ll need over the course of four years of college, students and their parents would be wise to hit the pause button, as one expert on the subject told me.
Baby step into a student loan.
“If a parent can’t afford it and a college isn’t particularly generous, the parents need to practice saying, ‘no,’” says Mark Kantrowitz, publisher and vice president of financial aid site Cappex.com.
The old-fashioned way
To pay for college, the Pounds family took a multipronged approach. First, my choice was narrowed to the University of Missouri and the University of Missouri. No Princeton, Northwestern or Wash. U.
My parents paid for tuition and room and board. I worked in a dormitory cafeteria for spending and travel money for my first two years, and at odd jobs, really odd jobs in my later years. I spent summers working as well — running a freight elevator at a publishing house one summer, working in a paint factory in another.
I finally took out student loans to finish college on the 5-year plan, but they were minimal. I was able to pay them off in a year or two.
When my kid went to college, I got lucky. He went to the Cooper Union in New York a few years ago — tuition-free. His mother and I split room and board and, later, rent, which was considerable. But, he we had him take out small student loans to have some skin in the game. He used loan money for living expenses and used books. He also paid his loans off quickly.
Today, most students aren’t that lucky and many students and parents must take out student loans. Certainly, some don’t realize the fix they have put themselves in until it’s too late.
Online calculators can help with estimate
If you’re thinking of borrowing money for college, you could use one of the many calculators available on the Internet to help make a more realistic assessment of the cost of the loan.
You also can start with the right mindset by approaching a student loan as if it were any other type of debt.
To be sure, you wouldn’t buy a car that’s $10,000 more than what you can afford just because it’s the one you like the best. Your car payment would weigh down your monthly budget and eliminate all or part of your discretionary spending. No more dinnertime burger runs or afternoon matinees.
Or, more significantly, it might push you to making smaller contributions to a 401(k).
If you wouldn’t do it with a car loan, why would you do it with a student loan?
Compare your income with school costs
Any comparison you make probably will require running the numbers — how much you’ve saved, how much in annual income you can contribute to school costs, including factoring in the American Opportunity Tax Credit, and any grants and scholarships you expect and compare that to tuition and living expenses.
The American Opportunity Tax Credit is a credit for qualified educational expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per student. If the credit brings the tax you owe to zero, you can have 40% of any remaining amount of the credit (up to $1,000) refunded to you.
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Seems easy. “That’s total debt less annual income,” Kantrowitz says.
But borrowing more than you need is an easy and compelling miscue to make. I interviewed a couple — Nate and Heather Comerford who blog at “HackingYourBudget.com” — and they agreed at times to a larger student loan than they needed.
“In the end, spending more time calculating your exact expenses for each semester before taking out a loan would have been very helpful,” Nate told me.
Borrowing more than you need
It’s a lot like those borrowers during the housing bubble who took out larger home equity loans or lines of credit than needed just because they could.
You should borrow as little as possible as slowly as possible. Kantrowitz says a good rule of thumb would be to plan to devote 10% of your income after graduation to paying down student loans. That gets your student debt paid off in 10 years.
RATE SEARCH: Compare student loan offers at Bankrate.com.
That’s a tough calculation to make since you don’t know if you’ll stay in your degree program or actually graduate. But make a best-guess calculation based on your school, your degree and your expected income.
If your calculations take your loan payments beyond your loan payments over 10 years, you’re looking at the wrong school and/or degree.
“It’s not just a stretch. It’s perhaps going beyond a stretch,” Kantrowitz says. “I would express caution about sending your child to that school.”
