If You Need to Borrow for Higher Education Do your homework and have a repayment plan
College or graduate degrees can provide career options and higher income, but they also can be expensive. If you need to borrow for school, carefully consider your options, keep the loan amount as low as possible, and have a clear repayment plan. Here are strategies to keep in mind.
Obtaining a Student Loan
First look into your eligibility for grants and scholarships. Many students qualify for some aid, so start by filling out the Free Application for Federal Student Aid (FAFSA) on the U.S. Department of Education’s Web site at www.studentaid.gov. You can learn more about the FAFSA and grant opportunities at that same site.
Know how much you need to borrow and that you can make the monthly payments. Your anticipated costs (tuition, textbooks, housing, food, transportation) minus your education savings, family contributions, income from work-study or a job, scholarships and/or grants will help determine how much you may need to borrow. Again, your goal should be to limit the amount you borrow, even if you are approved for a larger loan, because the more you borrow, the more money you will owe.
Also consider the minimum you will owe each month to pay off your loans, including interest, after you graduate and how it compares to your projected earnings. To help you project your future salary in the lines of work you’re considering, look at the U.S. Department of Labor’s statistics on wages in more than 800 occupations (www.bls.gov/oes). Your monthly repayment amount also will generally depend on your interest rate and the term of your loan, which can vary from 10 years to more than 20 years.
“Even though most student loans won’t require you to begin monthly payments until after you graduate — generally six to nine months later — a student loan is a serious commitment,” said Matt Homer, an FDIC Policy Analyst. He noted, for example, that many adults who borrowed more than they could afford to repay have faced serious debt problems for many years following their graduation. Unlike some other loans, federal and private student loans generally cannot be discharged through bankruptcy. Borrowers who fail to pay their student loans could be referred to debt collection agencies, experience a drop in their credit score (which will make credit more expensive and perhaps make it harder to find a job), and have a portion of their wages withheld.
If you need help deciding how much to borrow, consider speaking with a specialist at your school (perhaps a school counselor at your high school or an admissions or financial aid officer at your college). A college budget calculator also can be helpful, and you can use one from the Department of Education.
Consider federal loans first if you need to borrow. Experts say that, in general, federal loans are better than private student loans, and that you should only consider private loans if you’ve reached your borrowing limit with federal loans. Why? The interest rates on federal loans are fixed, meaning they won’t change over time. But the interest rates on private loans, which are often significantly higher, could be either fixed or variable (they can fluctuate). Federal student loans also offer more flexible repayment plans (see below) and options to postpone your loan payments if you are having financial problems.
When You Are in School
Set up direct deposit for your student aid money. Although some schools or financial institutions may encourage you to select a certain debit card or prepaid card for receiving part of your student loan or other aid (the part left after your school has subtracted tuition and fees), carefully weigh all of your options. School-preferred products may come with high fees and inconvenient ATM locations. Remember that you can always deposit federal loan proceeds anywhere you choose.
Keep track of the total amount you have borrowed and consider reducing it, if possible. For example, if your loan accrues interest while you are in school, you may be able to make interest payments while still in school, and this can reduce the amount owed later on. You could also repay some of the principal (the amount borrowed) before the repayment period officially begins.
Paying Off Your Loan
Select your repayment plan. Federal loans offer a variety of repayment options and you can generally change to a different repayment plan at any time. For example, one type of loan starts off with low payment amounts that increase over time. Another is the “Pay as You Earn” program that the Department of Education will soon make available, in which your monthly payment amount will be 10 percent of your “discretionary” income (defined by the Department’s regulations but generally what you have left over after paying key expenses). In addition, it may be possible to have any remaining balance forgiven after 20 years of payments. In contrast, private loans generally require fixed monthly payments over a period of time.
With federal loans you also may qualify for special loan forgiveness benefits if you pursue certain careers in public service. Remember, though, that the longer you take to repay any loan, the more you pay in interest (although in some cases you may receive a tax benefit for the interest you pay).
Make your loan payments on time. “Student loans are typically reported to credit bureaus, so paying on time can help build a good credit history, and paying late can harm your credit history,” said Elizabeth Khalil, a Senior Policy Analyst in the FDIC’s Division of Depositor and Consumer Protection. To help you stay on schedule, consider having your payments automatically deducted from your bank account or arranging for e-mail or text-message reminders.
Also, make sure your loan servicer — the company that collects your payments and administers your loan — has your current contact information so you don’t miss important correspondence, such as a change in a due date.
Consider making extra payments to pay down your loan faster. If you are able to, start by paying the student loans with the highest interest rates. If you have more than one student loan with a particular servicer, make it clear that you want to apply any extra payments to reduce the balance of the higher-rate loans.
Look into refinancing opportunities. You may be able to obtain a lower interest rate and even consolidate multiple loans of the same type into one loan. However, be aware that if you consolidate or refinance a federal loan into a private loan, you may lose important benefits associated with the federal loan (such as loan forgiveness for entering public service). In some cases, even consolidating one type of federal loan into a different kind of federal loan can result in lost benefits.
Contact your loan servicer immediately if you’re having difficulty repaying. Repaying student loans can be challenging, especially during tough economic times. “Remember that if you have a federal student loan that you’re having trouble paying, you have options that could help. Private loan borrowers may be able to get some assistance as well,” noted Jonathan Miller, Deputy Director in the FDIC’s Division of Depositor and Consumer Protection.