This week I’m posting a guest post by Travis from Student Loan Planner and the host of the Student Loan Planner podcast.
Student loans are a complicated and expensive thing and the help of an expert can be super valuable in the process. It can save you a small fortune and years of debt payments.
College introduces all kinds of new ideas. Some of the ones hatched outside the classroom aren’t always brilliant. But you’ll give it a go anyway. #yolo, right? One thing that should give you pause are student loans. Despite what Taylor Swift says, you can’t “shake it off” when it comes to student loan debt. It’s stickier than that, and you want to find ways to avoid it when possible.
But why be such a downer about student loans?
A college education can give you a leg up. Depending on your degree you could end up making six figures a year. But if you also have student loan debt that’s two times your income, then that money isn’t going to end up in your pocket. A big chunk is going to your student loans and the interest that accumulates during the time you’re in school.
By signing up for every student loan possible, you’re also signing up to have your loan servicer tell you what to do with your money for the next 10 years or more. Not cool.
That’s why it’s important to start planning out your student loans so you can take on the least amount of debt possible.
High-school is a great place to start avoiding student loan debt. You heard right.
Before you even start college, you can make some smart choices in high school that will save you time and money later on.
1. Take Advanced Placement (AP) courses. It pays to be a nerd.
Taking AP courses gives you free college credit if you pass the tests. If you pass enough of these exams you can skip some general education requirements when you go to college. That’s a free class, and you honestly can’t beat free.
2. College is only free in high school. Look into state programs.
Some states offer an early entry program into college for high school juniors and seniors. Running Start is an example of one program offered in Washington, Illinois, Hawaii, and Montana. Most of the time courses are free for level 100 or above and are count as dual credits for both high-school and college. Getting into a program like this can mean walking away from high-school with your first two years of general education requirements complete and no student loan debt.
3. Ace the ACT and watch the money flow in
If you get high scores on the SAT and ACT, it can lead to more scholarships and grants for your undergrad. It also helps to give you choices for which school to attend since they’ll be vying for your attention.
4. Be active in something other than Netflix binge-watching
Being a part of extracurricular activities, sports, and clubs at school means the potential for scholarship money. While sports are a common way to find funding from universities, don’t forget about the odd ones like chess club that could also bring in new scholarship opportunities.
Lastly, if you can squeeze it in, you might want to find a part-time job while in high-school. Colleges and Universities are always going to look at your grades and GPA, so don’t let those slip. But having an income of your own means you can be saving for college ahead of time. By doing all of these things you’re basically swinging into money for college.
The skinny on how to make smart student loan choices in undergrad
You tell yourself you’re not going to take on more student loans than you need. (Yes! You’re a boss!) But if you don’t actually know what you need, then it’s a well-intended plan that fails every time. So here’s how you can manage the number of student loans you take on in undergrad.
1. File the FAFSA early and annually. No excuses.
You want to file your FAFSA as soon as you can. This keeps you eligible for scholarships and grants from the school. This also ensures you can review your financial aid offer thoroughly.
Don’t forget to continue to file every year. You don’t want to miss a deadline because this could result in your aid being dropped.
2. Apply for scholarships like it’s your second job
The summer before you start your undergrad should be the summer of scholarships. Apply to as many as you can find. Use major search engines and contact local organizations that may offer scholarships.
Don’t stop there. Each year of your undergrad you should continue to apply for scholarships. Your school most likely offers some, but you can still bring in outside sources of funds to help offset tuition costs.
3. Don’t be duped by Subsidized and Unsubsidized loans
After you file the FAFSA, you’ll get your financial aid award letter from the school. You’ll notice a mixture of loan types. All of these loans will be federal direct loans. In undergrad, you’re eligible for both subsidized and unsubsidized federal student loans. You should know which loans to accept to save money. Here’s the difference between the two;
Subsidized loans are offered to students based on financial need. The school decides how much you can borrow.
Your federal limit for these is $23,500 in total. In your first year of school you can’t be awarded more than $3500.
These are the best types of federal student loans because they have a low-interest rate and the government pays the interest on these loans while you’re in school. When you need to take out student loans, start with these first.
Unsubsidized student loans are available for both your undergrad and graduate degree. These aren’t based on financial need, but your school still determines how much you can borrow.
Your federal loan limit for these is $31,000 if you’re a dependent student and $57,500 if you’re an independent student. But this number includes any of the subsidized student loans you may have taken out. It’s the total amount you’re allowed to borrow in direct loans during undergrad.
These loans have the same low-interest rate, but you have to pay all interest that accrues during school. If you don’t pay the interest before you leave school it’s added to your principal balance (capitalized). Meaning it costs you more in the long run since you’ll be paying interest on interest.
Pay attention to these options when you say yes to taking out student loans in undergrad. Subsidized student loans are going to be the cheaper option.
4. Say no to private student loans
Private student loans in undergrad don’t make sense. That’s because federal student loans have so many more borrower protections and a low-interest rate. With federal student loans you can stay eligible for student loan forgiveness programs and income-based repayment plans after graduation.
Private student loans don’t offer these same options and sometimes require payments right away. If you don’t have a long credit history, you’ll also need a co-signer to get a good interest rate. Asking mom and dad for their signature may not seem like a big deal until you miss a payment and their credit and your relationship take a hit. If you can take our federal student loans do so before ever considering a private student loan in undergrad.
5. Know the exact $ amount of student loan debt you have
School is crazy and stressful. But take time every semester to review your student loan situation. You can log into the National Student Loan Data System to see all the federal student loans you have taken out. It’s important to keep the total number in the back of your mind so you can plan for grad school or getting into the workforce.
6. See how you can cut your living expenses. (Not fun, but a fact)
This one is not everyone’s favorite cup of tea. Cutting down on living expenses doesn’t mean you need to give up everything you love. But it does mean giving up on things you can stand to live without. See if you can cut subscriptions and use your campus meal plan. Any way to reduce expenses means you can put that money towards tuition.
Here is comes again- try to bring in your own income while in school. Find a part-time job or apply for a campus work-study position as part of your financial aid package. Generating some cash flow that isn’t from your family will really help you avoid student loan debt.
Spilling the tea on grad school student loans
In grad school, you actually have the potential to live like a true baller. Imagine going out to eat, drinking all the beer your body can handle and living in a nice apartment to boot. This kind of lifestyle is possible in grad school because your borrowing limits aren’t actually that limiting.
You can take out up to $138,500 in unsubsidized student loans between both undergrad and grad school. Then you have access to Grad Plus loans and Private student loans. This, combined with high tuition and fees means students can easily walk out of grad school with $300,000 or more of student loan debt.
Grad school student loans will be a uniting factor among your peers, but you’ve gotta stand out from the crowd on this one.
1. Rethink the school you attend. Seriously.
You might not want to hear it, but your dream school could be one of the worst choices for your finances. When you’re looking at grad school private schools and universities that are out of state are going to cost you significantly more than an in-state public university.
To give you an example, the University of Illinois College of Medicine non -resident cost fo attendance is $47,178 more than the cost for a resident. Imagine that number over the course of a four-year grab program. You’re looking at an extra $188,712 minimum just for choosing an out-of-state program at a public college. That’s not even the most extreme example.
2. Exchange working hours for loans. Like a barter.
There are a number of loan repayment programs that offer assistance with grad school tuition in exchange for years of service after graduation.
For example, if you plan to go into the medical field, the Health Resources and Services Administration (HRSA) offers loans and scholarships for students. Most of the loan have the potential for forgiveness based on service.
Whenever you’re looking at these types of programs, you should compare them to your eligiblity for federal loan forgiveness programs like Public Service Loan Forgiveness. PSLF can forgive all your remaining student loan debt in as little as 10 years if you work for an eligible employer and make qualifying payments. This can be a better choice for those with serious student loan debt compared to a loan repayment program where years of service are required.
3. Ask your boss for help
It sounds uncomfortable, but it’s not like you’re walking into your boss’s office with your hand out. Employers offer funding programs to help pay for grad school. Both Verizon and UPS have tuition assistance programs. Plus, it helps that you would be working and bringing in some money while going to school.
4. Pull out your negotiation skills for your financial aid package
You can negotiate your financial aid package. It’s actually a great strategy to check for additional scholarships, work-study opportunities or a specific amount of student aid. To do this, you want to contact the person who sent the admission letter or the financial aid department. Be kind and nonconfrontational with your inquiry. The school doesn’t need to grant your request.
If they don’t offer additional aid, then you may need to look for another school that is more affordable.
5. Grad PLUS loans are crazy expensive, so look into private loans
When in grad school you can still get unsubsidized direct loans. They have a higher interest rate (6.08%) than the undergrad unsubsidized loans and the total limit for these loans is $138,500. If you go into medical school or pursue an MBA you can easily meet this limit.
If that’s the case you can apply for the Grad PLUS loan. It’s a direct federal student loan with the highest interest rate (7.08%). Not to mention the sky-high origination fees. It also doesn’t immediately qualify for forgiveness programs unless you consolidate with a Direct Consolidation loan right after school.
When you reach the point of needing a Grad PLUS loan, then it’s a good idea to compare it to private student loans. If you have a good credit history you can get a private student loan for a much lower interest rate. As long as you can afford those payments it could save your money on student loan debt in the long run.
It can be so tempting to partake in the luxuries of grad school. Especially when you already survived four years of communal showers from the 1950s in undergrad. But all the luxury won’t taste so good once you graduate and realize it’s amounted to six figures of student loan debt. Gross. Take the time to make a plan for the amount of money you need to pay for school.
Taking on the least amount of student loan debt will make you the smartest student in the room.
You should try to avoid student loans like you avoid that 7 am class that your counselor keeps trying to put on your class schedule.
Chances are you can’t skip out on student loans completely unless you have some serious family money or a full-ride scholarship. It sucks. Whatever student loans you do take on, need to be a calculated financial decision. One that accounts for your future salary and lifestyle. Run the numbers every semester and don’t let your total debt slap you in the face at graduation.
Travis Hornsby is the founder of Student Loan Planner and the host of the Student Loan Planner podcast. To date, Student Loan Planner has consulted on over half a billion in student debt. Travis is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.
He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. Student Loan Planner has helped over 2,600 clients save over $120 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, VICE, Fox Business, ChooseFi, Bigger Pockets Money, and more.
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