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Practical Credit Crisis Tips for Students and Families

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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.
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  • 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

  • Continue Investing in 529 College Savings Plans. It may be frightening to watch your savings erode as the stock market plummets, but if you pull out now you will be locking in losses and may miss the recovery. Dollar cost averaging, where you invest a fixed amount of money every month, works best when the stock market is volatile. As the stock market drops, your money buys more shares. The effect is the same whether the stock market is going up or going down, although it may generate more anxiety when the stock market is heading downward. Think of it as buying bargains.

    But if you do decide to pull your money out of the stock market, move it to a money market account or short-term certificates of deposit. Then wait for the stock market to rise at least 1% a day for three days in a row before jumping back in.

 

 
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