The beauty of student loans is that they help you achieve your goal of becoming a teacher by financing your own education. They can get pretty ugly, however, if you don’t treat them right. Here’s are five tips to borrow and repay at the lowest possible cost.
1. Get the best student loans for your circumstances. Start with the Free Application for Federal Student Aid (FAFSA). After you complete the paperwork and it is accepted and assessed, you’ll know if you’re eligible for federal loans, private loans, or a combination of the two. Be aware that private loans have higher interest rates and less attractive repayment terms than their federal counterparts. “Only consider them after exhausting every other option,” says Jacqueline Moreno, Director of College Access Initiatives for the Illinois Student Assistance Commission. You may be entitled to scholarships, grants, internships and employer tuition remission—free money that can reduce the amount you need to borrow. Contact your university for more information on such programs.
2. Borrow the correct amount. Just because you’re awarded a large loan, doesn’t mean you should accept the full amount. “The biggest mistake students make when planning for college and deciding how much to borrow is ignoring the return on investment,” says Moreno. Understand what you can expect to earn and compare it to the cost of earning that credential. Visit salary.com to see how much you may make (for example, the median salary for an elementary school teacher is about $50,000), then weigh it against what you may have to pay. Assess your needs carefully, then borrow accordingly.
Already on the job but your salary is insufficient to cover typical payments? Don’t despair. Look into loan forgiveness programs, which can eliminate a portion of your debt.
3. Get on the correct repayment schedule. Most borrowers immediately start the standard ten-year repayment plan, but this is by no means the only option. Depending on your financial circumstances, you may want to explore the alternatives:
- Accelerated. Want to pay your loans early? You can, and with no prepayment penalties. This plan is right if you have no other loans with a higher rate of interest and can afford the higher payments.
- Graduated. With this plan, payments start out low (though never below the interest amount) and increase every few years. Payments can stretch up to 30 years. This option can be attractive if you don’t earn much now but expect that you will in the future.
- Extended. If you need fixed monthly payments for up to 30 years, the extended plan may be right for you. Keep in mind, though, that you’ll pay more in interest with this plan than others.
- Income contingent. This plan looks at your income, family size and loan amount when determining your monthly payment. Each year your financial circumstances are reassessed, which will cause your payments to rise and fall.
4. Consider consolidation. You can lower your monthly payments by combining several loans into one packaged loan and extending the repayment period. This is called consolidation, and it can be a good option if the bulk of your loans are federal (private loans are generally not combined with federal loans), and the new interest rate is better than what you are currently receiving. The fixed rate for a consolidation loan is calculated by the weighted average of the loans being consolidated, and rounded up to the nearest one-eighth of one percent.
However, there are some drawbacks to consolidation, such as paying more in interest or losing the option for loan cancellation, so evaluate your own circumstances carefully before choosing this option.
Do you have high interest private loans? If you’ve been paying them on time for a few years and your credit is good, request a rate reduction or shop around for a single loan with better terms to cover the entire amount.
5. Don’t let your loan go into default. It is extremely important to keep your loans in good standing because the consequences of default are severe. These include:
- Aggressive collection tactics
- Tax refund interception
- Nonjudicial wage garnishment
- Ineligibility for deferments, flexible repayment options, grants and new student loans
- Collection fees
- A default notation on your credit report (which remains until the loan is cleared)
Pay attention to all mail from your loan holder, and request that communication come to you in e-mail. If at any point you can’t make your payments, you may apply for a deferment (suspension of payments and interest) or a forbearance (suspension of payment only). “Deferments are only applicable for a subsidized student loan, like a subsidized Stafford loan,” says Christopher Penn, Chief Technology Officer of the Student Loan Network. Unsubsidized Stafford loans and other loans accrue interest in both deferment and forbearance. “You are legally entitled to some deferments,” assures Penn, “as long as you meet the eligibility conditions.” Once you use them up, you can request a forbearance, if you are still not ready to pay.
Ultimately, student loans can be an inexpensive way to pay for your schooling. Borrow prudently, get on the most appropriate repayment schedule for your needs, and, never—ever—let them go into default. Do so and you’ll save yourself a huge amount of time and money.