College acceptance letters have arrived, and families are trying to decipher financial aid awards. By balancing academic, social and financial information, families can make a smart choice together.
With college debt on the minds of everyone from students to presidential candidates these days, it could be tempting to make your college choice based on cost alone. Equally important, though, is choosing a college where you have the greatest chance of completing.
For example, if you borrow $30,000 to attend a more selective four-year institution and graduate, you’ll be in a better position to land a good job and repay the debt than if you borrow $5,000 to attend a cheaper institution solely because of cost and then drop out before graduation because the institution wasn’t a good academic or social fit. That will leave you with the debt but no degree — and defaulting on even a small student loan can have disastrous financial consequences.
Of course, you should make smart decisions when it comes to borrowing for college, so here are three questions to ask as you’re comparing financial aid offers.
[Follow these six steps to determine how much to borrow for college.]
1. Can you stick to federal student loans? More than 70 percent of students borrow to help cover college costs, so it’s common for financial aid packages to contain student loans. It’s the type of loan that you need to watch for. Individual states often offer loan programs with flexible payment options and sometimes no interest — the terms vary from state to state, so you should check with your state department of education.
Federal Stafford and Perkins loans have the most generous payment terms, and best of all, they have annual and aggregate limits on the total amount you can borrow throughout your time in college.
For example, as a dependent undergraduate, you can borrow no more than $31,000 in Stafford loans for your entire four or more years of schooling. That means you’ll likely have a manageable payment come graduation.
On the other hand, if your financial aid package suggests you take on a private loan in addition, think long and hard before accepting that school’s offer of admittance. Private student loans can be harder to repay. While federal student loan payments can be based on income and in some cases even be forgiven, private loans rarely come with such protections.
[Ask these 10 questions before borrowing a private student loan.]
2. Will all the loans be in your name? Federal student loans don’t require credit checks or a co-signer; you as the student are the sole borrower and the only one responsible for payment. In contrast, private student loans typically require a co-signer.
Co-signing a loan should not be entered into lightly. Your co-signer is equally responsible for the loan. That means if you fall behind on payments, not only your credit record, but also your co-signer’s, will take the hit. And your co-signer will be pursued for payment.
Your financial aid package may also suggest that your parents take out a federal parent PLUS loan. Parent PLUS debt levels have increased significantly in recent years and since there is no debt-to-income analysis conducted before a PLUS loan is granted, many families are incurring debt well in excess of what they can ever hope to repay.
While many parents want to contribute to their children’s education or shield their children from debt, remember that the 18-year-old student will have far more time to repay the debt than parents nearing retirement. As the years go by, adult children may even come to appreciate economically independent parents not weighed down by heavy PLUS payments.
Now’s the time as a family to have an open and frank dialogue about if or how much parents should borrow. Remember, even if the student promises to repay the parent PLUS loans after graduation, these loans cannot be officially transferred to the student’s name. Additionally, income-based repayment and, in most cases, public service and other forgiveness programs are not available for parent PLUS loans and they typically cannot be discharged in bankruptcy. Consequences of defaulting on these loans include wage, tax refund and Social Security garnishment, and these loans must be repaid regardless of student employment or completion of studies.
[Know what to expect the first time you borrow college student loans.]
3. What will your expected monthly payment be? When you’re deciding how much to borrow for college, it can be helpful to think in terms of your monthly payment postgraduation versus the total amount you’ll be borrowing. For example, owing $30,000 is probably an intangible concept, but having a monthly bill of $345 for 10 years is easier to grasp.
First, consider how much you’ll likely borrow for all four years and then use an online calculator to determine your monthly payment. Review salary estimates for your intended major to get a better idea of how much to borrow. A good rule of thumb is to limit total student loans to less than your anticipated salary in your first year out of school, or to limit student loan payments to no more than 10 percent of your expected monthly income.
While experts are quick to quote those rules of thumb, incoming college freshmen may have a hard time wrapping their heads around what they want to be when they grow up — never mind how much they’ll earn per year and their student debt-to-income ratio. That’s where sticking to federal loans can come in handy, because you can base your payments on income for more breathing room in your budget, although that typically means payments for more years and more interest.
Ultimately, finding the right college financial fit is not one-size-fits-all. It’s a nuanced approach that takes into account your unique financial circumstances and thresholds for taking on debt, so you can make a realistic plan to pay for college. This doesn’t mean you should never borrow private loans, parent loans or an amount in excess of your salary — just go into your decision with eyes wide open.
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3 Financial Questions to Answer When Making the Final College Choice originally appeared on usnews.com
