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Practical Credit Crisis Tips for Students and Families
The following advice includes several tried but true tips. Most good
advice doesn't change just because one is in a financial crisis.
Borrow Smart
- Minimize Debt. Live like a student while you are in
school so you don't have to live like a student after you graduate.
Every $100 you spend using student loan money now will cost you about
$200 by the time you've paid off your loans.
- Avoid Overborrowing. If you're borrowing more than
$25,000 for an Associate's degree or $45,000 for a Bachelor's degree,
you may be borrowing too much. Similar signs of overborrowing for
graduate degrees (including undergraduate debt) are $75,000 for a
Master's degree, $100,000 for a PhD, $160,000 for a law degree and
$215,000 for an MD.
A good rule of thumb is to not borrow more for your entire education
than your expected starting salary after you graduate. A student
obtaining a degree in sociology or art history will earn less and
should borrow less than a student graduating with a degree in computer
science or nursing. Be realistic about your likely starting
salary. Not every culinary arts graduate is going to turn into the
next Emeril Lagasse, Rachel Ray, Wolfgang Puck or Bobby Flay.
- Borrow Federal First. Federal loans are cheaper, more
available, and have better repayment terms than private student
loans. The interest rates on federal education loans are fixed, while
the interest rates on private student loans are variable and may
increase over the life of the loan.
Unsubsidized Stafford and PLUS Loans do not depend on financial need,
so you don't have to be poor to qualify for low-cost federal loans.
The income-based repayment plan makes it
easier for students
who are experiencing financial difficulty or who are pursuing
public service careers to afford to
repay their loans. This repayment plan, however, is not available for
private student loans.
- Shop Around for a Lender. There are still many lenders
participating, but many are eliminating or reducing loan discounts
(federal) or increasing interest rates (private).
- Look for a Less Expensive College. Cumulative debt
correlates strongly with the tuition rates and cost of attendance. The
more expensive the school, the more debt you will accumulate by the
time you graduate. If you will need to borrow private student loans
in order to attend your first choice college, consider looking for a
less expensive college. Your second choice college may be just as good
but cost a lot less. When comparing colleges according to cost, focus
on the out-of-pocket
cost. This is the cost after subtracting just grants, not loans.
- Apply for Private Student Loans with a Creditworthy Cosigner.
Applying with a cosigner not only increases your chances
of getting the loan, but also results in a lower cost loan as the
interest rates and fees are based on the higher of the two credit
scores.
- If Interest Rates are Similar, Prefer LIBOR over PRIME. All else
being equal, interest rates pegged to the LIBOR index will generally
increase more slowly than interest rates pegged to the Prime
Lending Rate. The potential savings is 1/8 to 1/4 of a percentage
point over the life of the loan. (During the credit crisis, however,
the LIBOR index is spiking because financial institutions have stopped
lending to each other. The reduced supply of capital is driving up the
cost of capital, leading to increases in the LIBOR index that have not
yet affected the Prime Lending Rate.)
- Pay At Least the Interest During the In-School Period. This
avoids capitalization of the interest (which increases the size of the
loan) and may yield a lower interest rate or fees on the loan.
- Student Loan Consolidation. The main benefit of
consolidation loans is to combine multiple student loans into a single
loan. Many lenders, however, now offer unified billing. You can also
get extended repayment without consolidating if you have more than
$30,000 in debt with a single lender. Income-based repayment
will also be available starting July 1, 2009 and it doesn't require
borrowers to consolidate their loans.
Since most lenders are no longer offering consolidation loans,
most students will need to consolidate with the Federal Direct
Consolidation Loan Program.
Apply for Student Financial Aid
- Submit the FAFSA. It's free and is the first step toward
money from the government and many colleges. Submit it online at
fafsa.ed.gov.
- Search for Scholarships at Free Scholarship Matching Sites like FastWeb.com. The
more money you get in scholarships and grants, the less you
need to borrow.
- Education Tax Benefits. Don't overlook the
education tax benefits, including
the Hope Scholarship, Lifetime Learning Tax Credit, and the Tuition
and Fees Deduction. (Congress extended the Tuition and Fees Deduction
for another two years through 2009 and expanded the Hope Scholarship
tax credit for 2009 and 2010.) The education tax benefits can
save you a little money on your taxes based on amounts you paid for
college expenses during the year.
Ask for Help
- Talk to the Financial Aid Office.
- If your parents are denied a PLUS loan, the financial aid office can
increase your unsubsidized Stafford Loan limits.
- The college's preferred lender list is a good starting point.
- Let the school know if you are having difficulty finding a lender.
- Ask Bursar about Tuition Installment Plans. Tuition
installment plans let you spread out college bills
over 9 or 12 months for a one-time fee of $50 to $100.
Continue Saving for College
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