Top Five Things to Consider Before You Borrow Student or PLUS Loans

By this time of the year most new college freshmen and their parents have received their financial aid award letter or student aid report. If you’ve saved for college since your child’s birth, earn enough to pay cash for college expenses, or your college student won a number of scholarship, you probably don’t need to borrow money to help pay for college. But, if your child is among the approximately 2/3 of college students who DO borrow to pay for college there are five things you and your student MUST consider before you accept these loans.

1. Only borrow what is NEEDED. Some students only need to bridge a $1,000.00 gap between what they already have in the bank and what they will need to pay for college, but most students will receive an offer of much more than that in loans. Only borrow the minimum amount needed.
2. Always exhaust other sources of income and “free” money first. If your child qualified for federal work-study, they should work at least enough to earn what they qualified for. Even students who do not qualify for work-study can work part-time to help fund their education. Working only eight hours per week at minimum wage is enough to bridge a $1574.00 gap in funding over two, 16-week semesters. Students can also continue to apply for all possible scholarships because even a few small scholarships can make the difference between graduating debt free or not.
3. Do not borrow to pay for lifestyle expenses. I can’t tell you how many times I’ve seen students and parents borrowing thousands each year (currently at 4.66% to 7.21% interest or more) to pay for what are considered lifestyle expenses. These include any unnecessary expenses such as driving a car when other transportation is available, choosing a residence hall, apartment, or meal plan that costs more than the bare minimum, joining a Greek letter organization that the student can’t afford, and traveling for leisure or even study abroad that is not required for the student’s degree completion.
4. Avoid private student loans. Almost any financial aid office at any college will advise you to only borrow federal student loans, then if absolutely necessary, federal PLUS loans. Private loans are almost always a bad choice to finance a college education because the borrower does not have the various repayment options available from federal loans. If you reach the point where they are the only option, the student needs to seriously re-evaluate his or her choice of college and either take a gap year to earn more money, attend college part-time, or seek out a less expensive college. Chances are good that there is a less expensive alternative within commuting distance.
5. Use one of the many free, online student loan calculators to estimate future monthly payments. http://www.finaid.org/calculators/loanpayments.phtml  All loans will have to be paid back with interest, so students and parents can use these calculators to estimate what their payments will be and for how long. Pay close attention to the estimated salary needed to pay off the loan, and understand the total amount of interest paid on these loans. Students also need to be realistic when estimating their future salary. They can research average starting salaries at http://www.bls.gov/ooh/ , but keep in mind these are average salaries.