Borrow Smart: How to use student loans properly when paying for college
Over 45 million Americans carry a total of $1.7 trillion in student loan debt.
Unfortunately, numbers like that go thrown around all-too-casually these days, so let’s put it another way.
College graduates owe one-thousand billion, seven-hundred-thousand million dollars to federal and private lenders.
Worse yet, over 2.5 million borrowers have loan debt in excess of $100,000.
If this were a movie, a title would appear on screen right about now with the words, “The Student Loan Crisis: The Reckoning.”
How did we get here? That’s a long story.
How can we fix it? That’s an even longer story.
How do we avoid joining the crisis? We’re glad you asked.
Mind the (Funding) Gap
There’s nothing wrong with borrowing money to pay for college.
The vast majority of Americans choose to take out loans to do so. In fact, nearly 70% of the class of 2019 tapped federal and private loans to make ends meet.
Who can blame them? The cost of college has skyrocketed in recent years, turning what used to require a modest investment into costing a full-blown fortune.
To make matters worse, many families don’t fully understand the true cost of college. According to a recent Fidelity study, 25% of parents think one year of college tuition costs less than $5,000.
If only it were so simple.
In reality, the average net cost of attendance at an in-state public college costs about $20,000. Private colleges average over $33,000. As for the average net cost of the most elite schools like Harvard, Dartmouth, and Columbia? They average about $55,000 per year.
To be clear, those figures aren’t the “sticker price” on tuition. Instead, each of those numbers reflect the costs after all scholarships, grants, and discounts have been taken into account.
That’s where the “funding gap” comes into play.
And if the gap isn’t identified until late in the process — after your family has chosen a college and worked out all the math — rushed financial decisions tend to happen.
Some families will pay out-of-pocket, while others might even tap their retirement savings accounts to bridge the divide. As Sallie Mae reported last year, this is a growing and worrisome trend for many college-bound families.
Loans can be a powerful way to cover funding gaps, but only when strategically pursued.
Go Federal First
Federal loans are your best starting point. Though they have relatively small annual limits, the overall borrowing limit increases from the first to fourth year, starting at $5,500 and capping out at $7,500.
For most families, federal loans typically offer solid interest rates and up to $31,000 over the course of a four-year degree.
Depending on your family’s financial situation, you may even qualify for up to $23,000 in subsidized loans (which are interest-free while enrolled in school).
It’s important to note that federal loans do not require a co-signer, therefore promoting the protection of the parents’ savings and retirement accounts.
On the other hand, if you’ve already maxed out your federal loans and still have a small funding gap, there are a few other options to consider.
Consider Parent PLUS Loans
The popularity of Parent PLUS loans is on the rise. After all, they enable parents to cover payment gaps independent of their child.
Unlike federal loans for the students themselves, Parent PLUS loans have no annual limits. Instead, the maximum amount is determined by subtracting previously awarded financial assistance from the total cost of attendance.
While this pathway can provide financial flexibility, the lack of limits can embroil family in major debt. After all, Parent PLUS loans are entirely in the parent’s name.
As one family recently recounted to The New York Times, their Parent PLUS loans amounted to nearly $220,000 in debt that would require monthly payments of $5,000 if their loans weren’t put in forbearance.
Though this is an extreme example, Parent PLUS borrowers are on the rise across America.
In fact, there are nearly $101 billion in Parent PLUS loans today, as compared to $72.2 billion in 2014.
If you choose to pursue Parent PLUS loans, only borrow what you need and nothing more.
Note: If you have an especially strong credit history, you may be better off pursuing private loans to access their preferable rates (as low as 2.99%).
Apply for Work Study to Cover the Gap
Rather than pursue a part-time job during college, students should apply for work study.
Why? For one thing, wages earned from work-study aren’t included in student earnings assessed by the FAFSA. Whereas regular employment wages are subject to a fifty-percent assessment after the first $6,660 earned, work-study earnings are fully exempt.
This allows students and their families to remain eligible for additional financial aid while continuing to earn tax-free work-study stipends.
And how much can students earn? Recent reports found the average work-study payout was $1,847.
By working part-time — and on a schedule approved by the school — students can contribute $1,847 per year towards their tuition, lowering their total student loan amount by nearly $7,500 (over the course of four years).
That may well be the difference maker in covering your funding gap.
At College Aid Pro™, our tools take the guesswork out of college planning.
Instead of finding out about your funding gap at the end of the process, we’ll show you exactly what you’ll need to pay right at the start.
In a matter of minutes, you can identify essential college planning facts including:
- Your funding gap
- Your pre-approval amount
- Your net cost (on a four-year basis, not just the first year)
- Your student’s first, fifth, and ten year salary after graduation
- Your student’s monthly take home pay
- Your monthly loan payment
- And so much more
Want to see the full picture of your college investment? Get CAP in your corner by requesting a free demo below.