Overall, the need for student loan debt reform is clear. However, current economical conditions and increasing education costs don’t bode well for any significant changes in the near future. With the student loan debt now surpassing credit card and auto loan debt, it is more important than ever to take precautions and prepare as much as possible. These tips may help you decide if you want to make the sacrifices needed to get that next, or first, degree.
Make Informed Decisions
If you or a child is considering taking out a student loan at any point in the foreseeable future, make sure that you and/or the child is fully aware of the typical interest rates and repayment time frames, in addition to the other facts and statistics surrounding student loans. The first line of defense is knowing the facts. It is also critical to ensure that the student loan is fully necessary before applying for it.
Save Ahead of Time
If possible, use savings to pay for education rather than a loan start early. You can open a 529 account to save for educational expenses and receive the tax benefits that come with such plans. Any money saved towards education beforehand can make a real difference in the amount of student loans that are required, and reduce both the interest payments and the repayment time frame needed to eliminate the debt in the future. This will ensure you or your child is prepared for their future.
Pay Loans Back Quickly
As a general rule, the longer a student loan remains unpaid, the more interest accrues. It is in your best interest to repay the balance of the loan as quickly as possible in order to minimize the amount of interest and the length of time that having the outstanding debt will affect you financially. Treat debt as a short term solution to a problem, not a long-term crutch. Debt can be a useful tool, but it can quickly get out of hand if we are not very careful and disciplined in its use.
One student was shocked to find that for every additional day she took to repay her $28,000 student loan, she would be paying $2.33 in interest! This meant that for every single day she delayed repaying her debt in full, it was just as though she had gone out and spent money, minus any benefit! This is also crucial in light of the fact that student loan debt can only go up, thanks to Congressional ruling that student loan interest may only go up over time. This means that despite agreeing to one interest rate at the time you took out your student loans, the interest rate could increase over time, pushing the amount required to repay the loan up higher and higher as time passes.
Consider An Independent Advisor
Consider seeing an independent (non-government affiliated) financial advisor or counselor before taking on student loan debt. Amazingly, the Federal Department of Education is the default provider of advice to people considering taking out their first student loan. There is an implicit conflict of interest present here, as the entity providing you with advice is the very entity that stands to make a colossal profit from the deal should you decide to sign for a loan. This is like seeking personal financial advice from a bank or a credit card company.
Instead, consider finding a reputable independent financial advisor who you know you can trust to be objective and unbiased, and seek their advice on how to pay for your education. This way you can help to prevent the profit motive from becoming an issue in any advice they give you. All too frequently, asking people about their student loan debt stories leads to troubling tales involving confused and exhausted parents, clueless students, and college administrators who may never even question students about how the levels of debt they are taking out to pay for their education will affect their future.
Borrow Only What You Need
If you take out a loan for your education, it is critical that you take out the amount you need, no more, and no less. Should you take out more than necessary, you will still be required to repay that amount in full with interest, whether or not you actually needed that much for your education. So do not be tempted to take out extra and spend it on other nonessential things at college.
On the other hand, be careful not to be too conservative with your loan and take out too little either. Taking out too small a loan could result in not having sufficient funds to pay for your tuition or room & board, which could result in a withdrawal from college that could severely hamper your education and delay graduation. Think of Goldilocks here. You want to take out the perfect amount of college debt: as little as possible, yet as much as necessary.
Student loan debt is a tool, and it is a dangerous one at that. If handled carefully and repaid quickly, student loans can be a way to obtain a college education that you could not otherwise afford, but which may potentially allow you to earn more later in life. Just be careful to research all the facts, know what you are getting into, and have a good plan to repay the debt in a timely manner when (or even before) you graduate.