Feeling the crush of student loan costs? This guest post from Money.com may help.
Maybe you’re a high school senior looking forward to graduating and attending a fab four-year college next fall. Or a college grad hoping to maximize your skills base and earning potential by pursuing a graduate degree. I don’t blame you—or your parents, if they’re helping to finance your education—if you’re stunned by the cost of higher education today. Or perhaps you’re just one of the 43 million Americans who currently carry student debt and wake up every morning wondering how you’re going to manage to pay off your loans. The average college graduate in the US today has somewhere in the neighborhood of $40,000 in student debt.
That’s a big nut to crack. But by most accounts, it’s worth chewing on. A recent report from the Georgetown University Center on Education revealed that college graduates are likely to earn more than $1.6 million in their lifetimes than their high school graduate friends. That’s a big incentive for getting that diploma to hang on the wall.
But like a million ads for a million different products have asked before, “Why pay more?” Whether you’re just investigating college costs or already sitting on a bunch of student loans, you need a strategy. The goal? Paying as little as you can for the high-quality education you deserve. Let’s take a look at a few of the steps you can take to put that plan into action.
Best Tip of All: Let Someone Else Foot the Bill
No, we don’t mean your parents—though many students do rely on their folks for financial support while they’re pursuing their degrees. And that’s okay! Moms and dads want to do their best for their kids. Let them do their loving parent thing. It’s why you were born. But keep in mind that you can reduce the financial burden on them—and yourself—by pursuing scholarships, fellowships, and other financial awards. The organizations that fund these scholarships run the gamut from colleges and universities themselves to corporate entities like Coca-Cola to labor unions and professional societies. According to a 2022 report, more than 1.7 million such grants are awarded every year. Private scholarships alone total of $7.4 billion annually. Students who receive scholarships receive an average of more than $7000 per year. So do yourself a favor. Seek out websites that aggregate and organize scholarship information for you. Put your name on some scholarship alert mailing lists. And make friends with the financial aid officers at the university you choose to attend. When you’re trying to fund your college education, free money is the best money.
The Wild World of Student Loans
Granted, you might not be able to fund your entire college education through scholarships. That’s when borrowing money comes into play. The vast majority of students take out student loans. In fact, 79 million Americans have taken out student loans. Students borrow an average of $30,000 over the course of their college careers. Some loans are funded privately, but many students also take advantage of federal student loans. Each type of loan has its pros and cons
So what’s the best kind of student loan for you? That depends on a few factors.
Federal Loan Perks Explained
A well-qualified workforce drives the US economy so it’s no wonder that the federal government supports higher education. How much support? There are about 1.7 trillion dollars in federal student debt out there. Students flock to federal loans because they offer some significant perks. Let’s run through them.
- Applying for a federal student loan is easier than applying for a private loan. Forone thing, there’s no need to supply a credit history when you apply. That’s especially important for younger students who have not accumulated or paid off any debt. Most high school seniors don’t even have a credit score yet.
- You don’t need a co-signer to apply for a federal student loan. So if your parents or another family member can’t back you up on a loan, you can still get the money you need to pursue your degree.
- Federal loans come with fixed interest rates. That means you can lock in a rate for the term of your loan. Interest rates are relatively low right now, but they’re predicted to rise precipitously—and soon. So it’s likely that locking in a low rate now can save you thousands over the lifetime of your loan.
- Federal loan interest rates are typically lower than private loan interest rates. Right now, the rate is hovering around 3.73% for undergraduate students. Private loan interest rates vary according to your credit score and the term of the loan you take out. And they vary from day to day. For the month of April 2022, the average private student loan interest rate was 4.78%. The rates for a 20-year loan are higher than that. Federal student loans may offer loan repayment terms up to 30 years. If you choose a longer term, your monthly payments will be lower, but the lifelong cost of your loan will be higher.
- The interest on a federal student loan may not begin to accrue until you graduate. That varies on the type of loan you take out. This feature is attached to Direct Subsidized federal loans only, which are granted on a needs basis. With most private student loans, interest begins to accrue from the date you receive your funding.
- With a federal loan, your repayment options may be income-driven. So when you’re just starting out in your career and aren’t earning as much as an experienced employee, your monthly payments may be more affordable.
- Federal loans may be more forgiving than private loans. For example, when the economy tanked at the beginning of the global pandemic, the government paused loan payments to give students and borrowers a chance to recover. Payments on federal loans are still paused. They’re scheduled to begin again this August, but some experts are predicting that the pause may last into 2023.
- Federal loans offer deferment and forbearance options. Let’s say you hit a rough patch: you lose your job or suddenly have unexpected medical bills to pay. Federal student loans offer the option of suspending—sometimes for up to a year— while you’re resolving your financial problems. Keep in mind that interest may continue to accrue during this period.
So Why Would Anyone Take Out a Private Loan?
Given the many advantages that federal loans offer, why might you consider investigating private student loans? For one reason, it’s just good business to educate yourself on all of your options. But there are other reasons, too.
- Private student loan rates range widely, even from the same lender. The interest rate you’re offered will depend chiefly on your creditworthiness. Sometimes, particularly if you have a co-signer with a terrific credit profile and take out a relatively short loan, a private lender may offer you a lower rate than the government can. Private student loans are best for borrowers with excellent credit histories.
- Private loans have higher limits. The amount of money you’re allowed to borrow from the federal government may not cover the entire cost of your education. In fact, it likely won’t. As an undergraduate, you can borrow about $31,000 in federal money. Even if you attend a public university, you may have to spend considerably more than federal loan limits allow. If you’re attending a private college and have not secured any scholarships, that’s almost a dead certainty. With private student loans, you can typically borrow up to the full cost of your education.
- Private loans offer greater term flexibility. If you’re in a position to take out a very short-term loan, you can pay a low rate and also decrease the overall cost of borrowing money for your education. Private lenders offer variable loan terms and there’s no penalty for early payment.
- Private loans are available with fixed or variable interest rates. Federal loans are only available as fixed-rate loans. So depending on where interest rates go, you could wind up spending more as you repay your federal loans. If you take out a variable-rate loan through a private lender, your rate will fluctuate periodically. That can be a blessing or a curse. When interest rates go down, the interest you pay on a private student loan will probably decrease.
Managing the Debt You Already Have
Whether you’re mid-stream in your college career or mid-stream in paying off your loans, you can often find a way of shrinking the chunk of money you pay in student debt. It’s a good habit to periodically investigate whether student loan refinancing can save you some cash. When you refinance your student loans, your lender will pay them off. You can then start fresh with a clean slate.
You may find yourself in several circumstances that could make refinancing your student loans a smart move:
- This one’s a no-brainer: you took out your student loans when rates were higher than they are now.
- Your finances have improved and, along with it, your credit score. You may be earning more now. Perhaps you’ve been diligent about making on-time payments on all of your credit accounts. That’s the kind of thing lenders take positive note of and reward you for with lower rates.
- You can afford higher monthly payments now. Refinancing into a shorter-term loan can earn you a better interest rate.
Next to a home mortgage, your student loans may well represent the largest debt you ever take on. Understanding the ins and outs of education financing will help you make better decisions for yourself, whether you’re taking out new loans or refinancing existing loans. There are vast resources available online to help you get up to speed. And if you can’t find the answers you need online, don’t be afraid to ask questions—whether you bring them to the financial aid office of the school you’re attending, your lender, or your financial advisor. And as you would when considering any large purchase, before you take out a loan, make sure you shop around.
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She covers a wide range of personal finance topics, including debt and investing. Her contribution to this blog comes to us courtesy of Money.com.