For many college students, student loan debt is unavoidable. Among students who file the Free Application for Federal Student Aid (FAFSA), about 85% of Bachelor’s degree recipients graduate with student loan debt, an average of about $30,000.
Very few students graduate with no student loan debt. Aside from picking wealthy parents, students who graduate with no debt tend to enroll at an in-state public college, such as a low-cost community college, and live at home with their parents.
If you can’t eliminate student loans entirely, these tips will help you find ways to reduce the amount you have to borrow and the cost of repaying your student loans.
Choose a Cheaper College
Every college is required to have a net price calculator on its web site. These calculators provide a personalized estimate of your one-year net price to attend the college.
The net price is the difference between total college costs and gift aid. College costs include tuition and fees, room and board, textbooks and transportation. Gift aid includes grants, scholarships and other money that does not need to be earned through work or repaid. Think of the net price as a discounted sticker price.
Just as airlines charge a different price for every seat on an airplane, different colleges will charge you a different net price. All get you to your destination, despite the differences in price.
When building a college list as a high school junior and senior, consider financial fit in addition to academic fit and social or environmental fit.
Similarly, when comparing college financial aid award letters, calculate the actual net price.
Beware, as some colleges do not list the cost of attendance on the award letter, or list only part of it (e.g., just the direct costs, such as tuition, which are paid to the college). Other colleges blur the distinction between grants and loans, presenting loans as though they reduce college costs.
Prefer colleges with a lower net price, unless the difference in net price is less than $1,000. But, be careful, as about half of colleges practice frontloading of grants, where the net price is lower during the first year than during subsequent years.
A lower net price correlates with lower debt at graduation.
Your most affordable options will include in-state public colleges and colleges with no-loans financial aid policies. Public colleges give you just as good a quality education for a quarter to a third the price of private colleges. Colleges with no-loans financial aid policies, which include the Ivy League colleges and MIT, replace loans with grants in their need-based financial aid packages.
But, don’t take a detour through a community college on your way to a Bachelor’s degree, as it may cause you to miss your destination. Community colleges are good options for an Associate’s degree or Certificate. However, if your goal is to get a 4-year degree, only about a fifth of students who start off at a community college graduate with a Bachelor’s degree within six years, compared with two-thirds of students who start off at a 4-year college.
Maximize Non-Debt Resources
Focus on free money first.
- Apply for need-based financial aid by filing the Free Application for Student Financial Aid (FAFSA) as soon as possible on or after October 1 of the senior year in high school and each subsequent year. Students who file earlier get more grants.
- Search for scholarships using free scholarship matching services, such as Fastweb.com and the College Board’s Big Future. Increase the number of matches by answering the optional questions, not just the required questions. Apply for every scholarship for which you are eligible.
- Claim the American Opportunity Tax Credit (AOTC) or Lifetime Learning Tax Credit (LLTC) on your federal income tax return.
Every dollar you win in scholarships and get in grants is a dollar less you’ll have to borrow.
Save for college using a direct-sold 529 college savings plan to reduce the need for student loan debt. College savings can also increase college choice, letting you choose a more expensive college than you could otherwise afford. Every dollar you save is a dollar less you’ll have to borrow.
Work a part-time job during the school year and full-time during the summer to earn money to pay for college costs. You can earn up to about $7,000 per year without affecting eligibility for need-based financial aid. Ask your employer if they provide tax-free tuition assistance.
Cut College Costs
About half of college costs involve living expenses, not tuition and fees. Adopting an austere lifestyle can reduce the need to borrow. Live like a student while you are in school, so you don’t have to live like a student after you graduate.
A few key ways to cut college costs include:
- Life off campus in an apartment with a roommate to split the rent, or get free rent by living at home with your parents.
- If your parents live more than a day’s drive away, minimize the number of trips home from school.
- Buy used textbooks and/or sell your textbooks back to the bookstore at the end of the term. This can cut textbook costs in half.
- Take advantage of free resources at college and college discounts.
Know What You Owe
Increasing awareness of spending and debt is the first step in exercising restraint.
Budget before you borrow. Distinguish between needs and wants. Cut college costs by borrowing only what you need, not as much as you can. Every dollar you borrow will cost about two dollars by the time you repay the debt.
Understand your student loans. Estimate what you will owe and your monthly payments under the standard repayment plan. Learn how interest works, deferment and repayment options, and what happens if you don’t repay your student loans.
If you must borrow, borrow federal first, as federal student loans are less expensive and offer more flexible repayment terms than private student loans.
If you exhaust the federal student loan limits, it may be a sign that you’re borrowing too much money. Keep your student loan debt at graduation in sync with income. Aim to borrow no more for your college education than your expected annual starting salary.
If you must borrow private student loans, shop around for the lender that offers you the lowest cost loans. Apply for a private student loan with a creditworthy cosigner to increase the odds of approval and to reduce the interest rate.
Plan for Paying Back Your Student Loans
Make a plan for how you will be able to repay your student loans.
Here are my top tips on how to save money when repaying your student loans.
- Choose the repayment plan with the highest monthly payment you can afford. A higher monthly payment reduces the total interest paid and pays off the debt quicker.
- Pay more than the minimum to reduce the total interest paid over the life of the loan.
- Target the loans with the highest interest rates for quicker repayment by making extra payments on those loans.
- Take advantage of in-school and autopay discounts, which can yield a lower interest rate.
- Claim the student loan interest deduction on your federal income tax returns.
- Ask friends and family for help repaying your student loans. This is a good alternative to the usual graduation, birthday and holiday presents.
- Look for jobs that offer student loan repayment assistance programs or student loan forgiveness.