students: Welcome to the debtors clan.
you are like most students, you will need student loans
to pay for college. And while thatís a scary thought
for some, there is no reason to fret.
all the headlines about ruinous student loans, taking on
some loans to go to college is not inherently dangerous
if you pay attention to the type of loans you choose and
are honest with yourself about your career plans.
true even if you borrow the full $27,000 over four years
that the federal government will let you borrow with
federal Stafford Loans, said Mark Kantrowitz, president
of MK Consulting. As a rule of thumb, he notes, students
should not borrow more than they will earn each year on
a first job out of college. And since the National
Association of College Employers reports graduates
earning $35,000 to $55,000, $27,000 is manageable, he
said. But here are four college loan lessons to follow.
the right loans: If you go online and type in
"student loans," you will be off to a bad
start. The first loans to pop up are private loans. In
other words, they are provided by banks or other
lenders. Since those lenders need to make a profit,
these loans typically are not the best. They can lock
you into payments that might be tough to afford, and
they donít give you a way out if you lose your job or
get a low-paying job.
take out only federal student loans, which are called
Stafford Loans and Perkins Loans. Check out the U.S.
Department of Education site and insist on federal
student loans when talking with your college financial
you canít get a job after college, or get fired or end
up with a low-paying job any time while paying off your
loans during 10 years, federal student loans cut your
payments to affordable rates. If you havenít earned
enough to pay off your loans in 20 years, the government
lets you off the hook. Private lenders generally donít
your interest rate: If you get a federal Stafford Loan
this year you will pay 3.76 percent in interest, which
is a very low interest rate ó the type you want. But
be aware: Some private lenders might show you a lower
interest rate online that may look tempting. The trouble
is, this is probably going to be a "variable
rate," which means it wonít stay low continually.
As the months and years go by, a variable rate changes
your interest rate. So the interest rate can jump higher
ó probably a lot higher than you see now.
reason you want federal student loans, instead of
private loans, is that both Stafford and Perkins loans
have "fixed rates" that wonít change as you
pay off the loans a little each month for up to 10
years. So if you borrow the full $5,500 the federal
government will allow in Stafford loans for a college
freshman this year and the interest rate is 3.76
percent, you will pay roughly $55 each month for your
loans and a total of about $6,600 over 10 years. As a
comparison, with a 6 percent rate, youíd pay $61 a
month and a total of $7,330 over 10 years.
if you need to borrow more: The second year you are in
college, the federal government will let you borrow a
little more: $7,500. For a four-year education, your
federal loans can total $27,000. The government holds
you back early in college because too many students drop
out and hurt themselves. They have large loan burdens,
and canít get the kinds of well-paying jobs available
to college graduates.
beware of taking on private loans to supplement your
federal student loans if you are just experimenting with
college. If you are committed and need more money, your
parents may help with federal Parent PLUS loans. These
carry interest rates of 6.31 percent. Private loans may
offer better rates for parents with excellent credit
scores, but Kantrowitz notes one advantage with the
federal PLUS loans: If a parent dies or is disabled, the
debt is forgiven.
all colleges are equal: Before taking on a lot of debt,
consider whether your pay after college is likely to be
adequate for your level of debt. If, for example, you
will be a preschool teacher earning $30,000, you donít
want $50,000 in debt.
check the College Scorecard for the college you will
attend. Graduates of some weak colleges have trouble
afterward getting jobs or paying off loans. If you find
a troubled school, consider another or limit your