Each year, millions of students head off to college with dreams of securing an education and a better financial future. While college represents a great opportunity, there are many financial risks associated with attending.
One thing that all student loan horror stories have in common is that the borrower never expected to run into a lifetime worth of student debt. Nobody plans on not being able to finish school. Nobody plans on not finding a job when they graduate. Nobody plans on not being able to afford their student loans. Unfortunately, it happens to millions every year.
The best advice I can give to anyone attending college or planning to attend college is to avoid student loans. The second best advice I can give is to only get federal loans if you insist on borrowing money for college.
Despite my brilliant advice, millions will use private loans to fund their education. Many view this as a necessary step to cover the gap between federal aid and the cost of attendance. For some, this decision will pay off. For others, it will be a mistake.
Being Smart About Private Student Loans
Explaining the dangers of student loans is like is a parent explaining the birds and the bees to their teen. The teen’s parent may prefer the teen to abstain from extracurriculars, but in an abundance of caution, they also teach about the safest practices. If the teen is going to engage in an activity that could lead to a lifetime commitment – the parent wants their teen to at least be smart about it.
Similarly, my preference for anyone attending college is to avoid private student loans. However, if you are going to take out private student loans, you need to be smart and protect yourself. You need to practice safe borrowing.
Avoid Fees – Read the fine print on any student loan. Disbursement, origination, or prepayment fees are huge red flags. Any reputable student loan lender should not have any of these fees.
Watch Interest Rates – Avoiding a student loan catastrophe means keeping a close eye on interest rates. At present, many lenders offer rates below 3%, while others go well over 10%. The higher the interest rate, the harder it will be to pay off and the more it will cost in the long run.
Shop Around – There are a ton of companies offering student loans. Lending money for college is appealing to banks and other financial institutions because, unlike mortgage debt and credit card debt, it is almost impossible to discharge in bankruptcy. That means borrowers are stuck with their loans for life or until they are paid off. The good news for borrowers is that because there are so many lenders to choose from, there are good deals to be had. Fortunately, shopping around is easy and it doesn’t take a lot of time.
Spend Smart – Don’t spend $200,000 on a basket weaving degree. There are many options to get credits at less expensive schools and to transfer them to your “dream school”. The sad reality is that many programs that are not worth the price of admission. If a reasonably expected salary at graduation isn’t enough to pay off the student loans, it is time to consider a different program or a less expensive school. Make sure the job placement statistics and salary information justify the money that you are spending.
Pay Off the Interest Each Month During School – Student loans actually accrue interest on a daily basis. If you pay off the interest each month, you are ensuring that the balance doesn’t balloon out of control by the time you graduate. This practice is highly recommended because it is also a great way to keep track of your debt balances. Each year as you borrow more student loans, your interest-only payments will increase. It provides a not-so-subtle monthly reminder of your future obligations and the importance of avoiding excess borrowing. Compounding interest is not your friend.
Consider All of Your Options – Starting school at the local community college may not seem ideal, but the credits count just the same. Employers may look at the name of the school on the diploma, but they do not care what percentage of the credits were earned there. If you are deciding between schools, try to get the financial aid offices bidding against each other. The more grants and scholarships you can secure, the less you have to borrow.
Most Important: Borrow Only What Is Necessary
When I was in law school, I was given this piece of advice: you can live like a lawyer during law school or you can live like a lawyer when you graduate — but not both. In other words, if you spend a bunch of money while you are in school, you will be living on the cheap long after graduating.
While tuition and books might cost a fortune, there are many ways to keep costs low. Substitute a less expensive option whenever possible. A weekend camping and drinking cheap beer with friends is just as much fun as expensive cocktails at a fancy hotel. If you are not sick of ramen noodles by the time you graduate, you are spending too much money on food.
The sacrifices made during school will make a huge difference after school.
The Private Student Loan Warning…
The Student Loan Horror Stories you have heard are real. Private student loans are a leading cause.
If you are going to borrow, be smart and borrow responsibly. Practice safe borrowing. Your future self will thank you.