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By Kristen Kuchar
September 2, 2020
Rangely Garcia / Money

For many college-bound students, loans are simply an assumed part of earning a degree. They’re often seen as a necessary tool to attend a college that could open up career prospects and lead to higher earnings, which is why roughly two-thirds of bachelor’s degree recipients graduate with student debt.

But just because millions of students do take out loans each year doesn’t mean you should borrow blindly. That’s one way to get trapped with debt you can’t actually afford.

Whether you’re just starting to apply to colleges or you’re a current student who needs more money to pay this semester’s bills, here’s how to make sure you can handle your loans (and possibly even reduce what you’ll owe).

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Choose an affordable school

The college you attend can have a significant impact on how much debt you’ll walk away with. For many students, an in-state public college will be their most affordable option. And on average, public college graduates do have less debt than students who attend private colleges, about $26,900 versus $31,450, according to The Institute for College Access & Success.

But that’s not true in every case. When you’re deciding where to apply, be sure to research colleges’ financial aid policies: do they award most of their aid based on financial need or do they have some merit-based scholarships? Would you qualify for either? Then get an individualized estimate by inputting your family’s financial information into each college’s net price calculator.

Don’t overlook factors like whether you could live at home and commute to save money or whether the college is in an expensive metro area, where rent (and room & board) are likely to be higher. Of the 25 colleges with the highest published prices for room & board, 19 are in New York City, Boston or San Francisco, according to data from the Department of Education.

Consider out-of-the box solutions

If you’re flexible about where you attend, you may be able to take advantage of some out-of-the-box strategies to reduce your out-of-pocket expenses. One option? Finding (and getting hired by) an employer who will help cover the bill. In 2018, about half of employers offered tuition assistance to employees, according to a survey by the Society for Human Resource Management. The details of the benefit — including how much money you can get — varies by each employer. But note that some companies may require you to agree to stay on as an employee for a certain amount of time, only pursue specific types of degrees, or attend a certain college.

If you’re willing to work in a different capacity, consider applying to a “work college,” where all students on campus clock in for an average 8 to 15 hours a week in exchange for reduced tuition, according to the Work Colleges Consortium. Some colleges, such as Wichita State University, and The University of Kentucky, offer legacy discounts, where you can get a reduced tuition rate if a parent or grandparent has attended. If your parent works at a college, you also could get a considerable break on tuition costs, not only at the institution where your parent works but other colleges as well. Tuition Exchange, a consortium of more than 600 colleges, offers reciprocal scholarship opportunities to the children of eligible faculty and staff.

Apply for scholarships

It is very difficult to get a “full-ride” scholarship to any college, but that doesn’t mean it’s impossible to earn multiple smaller scholarships to reduce how much you need to borrow. Each year, there is $7.4 billion in private scholarships and fellowships awarded to students, according to Savingforcollege.com. There are several national scholarship searches available, including the U.S. Department of Labor’s scholarship search and mobile-friendly scholarship search engine, Scholly. You can also look for more localized scholarships at your college’s financial aid office or nearby community organizations. And don’t overlook professional organizations based on your major.

Keep in mind: you shouldn’t only apply when entering your freshman year. Deadlines and award qualifications vary. In fact, some scholarships are only open to students who are further along in their college journey.

Fill out the FAFSA

The Free Application for Federal Student Aid, better known as the FAFSA, is your ticket for qualifying for federal grants, which are free money you don’t have to pay back. Your FAFSA application is also what determines if you’re eligible for work-study positions, which are federally-funded on-campus jobs, and the application allows you to borrow federal loans, which have better terms than private loans. (More on that below.)

Finally, the FAFSA also is required for many state scholarship programs, and even some outside scholarship organizations that aren’t tied to the government require it. Just like with scholarships, it’s not too late to fill out the form if you haven’t. You have until this end of this academic year to fill out the FAFSA for funding this year.

Understand how student loans work

Understanding how the loans work before you borrow means you won’t have any surprises down the line. First off: Know that just because you are offered federal student loans in your financial aid package doesn’t mean you have to use them or that you have to accept the full amount you’re offered. On the other hand, if you initially declined some of the federal loans you were offered for this academic year, but now realize you need them, talk to your financial aid office about accessing the rest of them.

For federal loans, interest rates are fixed, meaning the rate will stay the same until you pay off your loan. Rates are set each year; the current interest rate for undergraduate borrowers is 2.75%, while it’s 4.30% and 5.30% for graduate and parent loans. Interest rates on private loans are typically higher than federal loans, unless you have a stellar credit history, and the rates can be either fixed or variable. A variable rate changes over time, going up or down, based on economic conditions.

Unless you have a subsidized federal loan, interest starts accruing as soon as you take the loan out, which means your loans will grow while you’re in school unless you take steps to pay off the monthly interest. When you do make a payment (whether you’re enrolled or out of school), the money goes first to cover accrued interest, then the remaining amount goes toward the principal balance.

If you need to pause your repayment for whatever reason, interest can be capitalized. This means the unpaid interest is then added to your principal balance, increasing the amount your future interest will be based on.

Consider your future earning potential

Whether your student loans are manageable depends in large part on how much you’re earning. A graphic designer earning $52,000 a year may struggle to repay a $50,000 debt more an engineer earning nearly $100,000. That means it’s smart to have an idea of your future earning potential before you start taking on debt. Mark Kantrowitz, publisher at Savingforcollege.com, recommends borrowing no more than your anticipated first year’s salary. Otherwise, you may struggle to afford your monthly payments. You can find salary projections on websites, such as Salary.com or Glassdoor or by searching job sites for listings to something similar you’ll be looking for when you graduate.

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Know the difference between federal and private student loans

There are big differences when it comes to federal and private student loans. Federal loans come with benefits that private loans don’t offer – including loan forgiveness possibilities, income-driven repayment plans, and more options to defer loans if you lose your job or are struggling financially. Federal loans also offer some need-based subsidized loans where the interest is paid during times of deferment.

Because of the flexible payment options and other benefits that come with federal loans, most experts recommend sticking to those and avoiding private loans altogether. Still, about 5% of undergraduates used private loans in 2015, according to The Institute for College Access and Success.

If you decide a private loan is right for you, don’t just sign the first offer that pops up. There are many things to consider, including the interest rate, available loan terms, and reviews and reputation of the lender. You may also want to research which lenders offer options to pause or lower your payment in a financial crisis or which lenders offer co-signer release, if that’s important to you.

Consider your cosigner carefully

Most private lenders require a cosigner since a majority of students have limited or no credit history or income. If that’s the case, you’ll need to ask a responsible relative with steady income and good credit. You should also understand what you’re asking of your cosigner. They are stuck with your loan if you can’t pay, and that loan hangs around on their credit report, making it more difficult to buy or refinance a home.

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