Let’s be honest for a second. If you are preparing to spend the fall of 2017 at an institution of higher learning, whether it’s for a bachelor’s or master’s degree, chances are you’ll need to take out student loans. It’s not your fault. You didn’t do anything wrong. It’s just how the system works.
And if you are going to have to borrow thousands of dollars, you’d better be prepared to pay it back. And that preparation needs to start before you ever receive even one cent. Preferably, it starts right now…with you reading this article.
There is over one trillion dollars in outstanding student loan debt in the United States, according to the Department of Education. And they would know. Roughly nine out of every 10 of those trillion plus dollars was lent out by the DOE.
If you are going to pay back your part of that massive sum and get Uncle Sam off your back as soon as possible, you’ll need to follow these three guidelines.
1. Do not borrow more than you need or can afford.
Sounds simple enough, right? Wrong.
The first part — borrowing more than you need — can be very tough to fix. How much money do you need to live for one year? That’s the question you need to answer. If you’re a first-time college student, this can be especially tough. Living on a budget can be a tough task and trust me, surviving on ramen noodles is harder than you think.
But figuring this out is key. Most schools will offer incoming students some idea of how much they can expect to spend during the academic year, but that does not usually account for “life expenses” like movie tickets or other weekend activities.
Students can can also fall into the trap of frivolously spending any leftover money they may have from their loans. Sabina Monaghan was one such borrower.
After borrowing $45,000 for a master’s program, Monaghan had some funds leftover. But instead of immediately paying that money back, she decided — as many borrowers do — that she needed a vacation.
“There was about $6k left over so I used some on a vacation and then to pay some bills” says Monaghan. “If I had to do it over again, I would have just paid it back.”
Luckily, the second part — borrowing more than you can afford — is easier to prevent. This begins with knowing the field into which you are planning on earning a living once you’re higher learning is complete.
Knowing how your future debt will compare to your projected future income will give you an idea of what you can afford to borrow now. The Bureau of Labor Statistics has an occupational employment statistics program where you can find the median and average income by state and profession.
2. Do not opt for private loans before maxing out federal debt.
Remember what I said about only borrowing what you need? That’s still true. Do not be fooled by the term “maxing out.” What this means is that when you borrow, you should borrow whatever you need from the DOE’s financial aid office.
Only if you reach your maximum amount with the DOE should you even think about a private loan (and if that actually happens, you probably didn’t do step one correctly). The reasons here are that not only do the federally subsidized loans have lower interest rates, repayment is much more flexible with the federal government than it is with a private lender.
Student loan consultant Jan Miller has worked in finances for 19 years and he has seen those private loans — which account for roughly 10 percent of all student loans in the U.S. — come back to bite people in the butt. In fact, that’s how he makes his living.
“Even though five percent of all student loans are private,” says Miller. “50 percent of my clients have some kind of private loan debt outstanding.”
Miller’s clients are mostly professionals. Doctors and people like that. But when it comes time to repay the loan and they want to refinance at a lower interest rate, those zeroes do not help much.
“I’ve seen people with 850 credit scores and a salary of $100,000 get declined,” says Miller. “If your annual income is less than half of your total debt, forget about it. And realistically you need a 1 to 1 ratio of salary to debt to have a chance.”
3. Make sure you are student loan “literate.”
This means that, yes, you’ll have to do some reading. Ideally, you should start here, with the financial aid office’s own beginners guide to student loans. The financial aid office’s website also offers a decent breakdown of the different repayment options you’ll have once it’s time to start making your monthly payments.
But perhaps more importantly, you’ll need to know who to talk to about your loans and where to get good advice. Unfortunately, good help can be hard to find, according to Miller.
“You can’t talk with your school financial aid as much as they think they understand student loans, they don’t. They know how to get you into debt, they have no idea how to manage it,” says Miller.
Even professional financial planners can have difficulty giving you sound advice on dealing with your student loan debt after you’ve graduated.
“I have a lot of financial planners reaching out to me saying ‘this is getting over my head. These people want to plan out their life and I can help them do that but the biggest part of their debt is student loans and it’s a whole new world,” says Miller.
The key is to know who to you are talking to and what shortcomings they may have. Ask questions. Even if you know the answer, double check.
In the end, the best course of action may be to learn the rules yourself. The DOE’s website has all the relevant information available. If you can stick to federal loans, learn the best options for your own situation, and stay within your budget, you will come out the other side of your college experience with better days ahead and a manageable student debt load.