With the volume of student loans on the rise, fears of a bubble in educational spending are not without merit, warns Moodys Analytics in a recent report. Moodys sober assessment: Unless students limit their debt burdens, choose fields of study that are in demand and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.
Amen. In my previous column, I gave graduates advice on how to ease their debt burden. But the best strategy is to limit how much you borrow in the first place.
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SEE ALSO: Tax Credits for College Expenses
Choose a school that fits into the family budget. Families seem to be learning that picking a school is an economic decision as well as an academic one. In a survey by Fastweb.com, 45% of students ranked quality of major as their top reason for choosing a school. But scholarship or financial assistance (43%) and total costs (41%) came in a close second and third -- even higher than academic reputation (38%).
Among students who leave school with no debt, 85% graduated from public colleges, according to a report by Mark Kantrowitz, publisher of Fastweb.com and FinAid.org. Selecting an affordable school doesnt have to mean sacrificing quality. To find public and private schools that deliver both, see our Best College Values special report.
Bypass the four-year route. Starting at a community college and transferring to a four-year school can save a lot. You can also slice a year off your expenses if your child takes Advanced Placement courses in high school or qualifies for college credits through the College Level Examination Program.
In Kantrowitzs study, half the students who graduated with no debt graduated from a community college (one-third graduated from a public four-year college). Other hallmarks of students who graduate debt-free: They tend to spend less on textbooks -- $1,000 or less per year (see How to Cut College Textbook Costs in Half -- or More) -- and are more likely to live at home with their parents.
Use money you dont have to pay back. Its never too late to save, especially if you live in a state that gives you an income tax break for contributions to state-sponsored 529 plans (find the best 529 plan for you). Visit FastWeb.com to look for scholarship and grant money from schools and other sources where your students grade point average or other achievements would make him a standout (for inspiration, read about a student who put himself through school with zero debt).
If you must borrow, borrow smart. Start with government-sponsored loans, which offer flexible repayment options -- such as lower payments and deferral -- and fixed interest rates. These include Perkins loans, for eligible students, and Stafford loans, which may be subsidized if your student qualifies. Also look into PLUS loans for parents or a home-equity line of credit. (For more information on student loans, go to StudentLoans.gov.) With that combination you shouldnt need private loans, which carry a variable interest rate and generally require a co-signer (see Be Wary of Private Student Loans).
Apparently, many students dont realize that federal loans are the most attractive. A majority of undergraduates who take out risky private loans could have borrowed more in safer federal loans instead, reports the Project on Student Debt.
One of our young staff members here at Kiplinger told me that the financial-aid office at his college steered him to private loans before he had exhausted his federal borrowing. He spotted the mistake, but not every student is so savvy. The Project on Student Debt found that counseling and information at critical decision points can really help borrowers make smarter choices.
Its also smart to pay all or part of any loan interest as it accrues so that it isnt added to the balance that has to be repaid. And remember that even the best student loan can be a dual-edged sword, encouraging a student to borrow more than he should.
Know what youre getting into. Use the Student Loan Advisor calculator at FinAid.org. It provides an estimate, based on starting salaries of various professions, of the maximum in student loans your child should take out and how much it will cost to pay it back.
One rule of thumb is that students should try to limit their total borrowing to no more than their expected starting salary when they graduate. FinAid warns that if you borrow more than twice your expected starting salary, you will be at high risk of default.
Choose a marketable major. Moodys is right on the money in suggesting that students pick fields of study that are in demand. That doesnt mean your child has to major in engineering or computer science. But if shes majoring in economics, it couldnt hurt to take accounting. If shes studying history or government, she could learn a foreign language. And if she insists on studying something as precarious as journalism, she should minor or concentrate in another subject -- such as business, health or computer skills.
Follow Janet's updates at Twitter.com/JanetBodnar.
Great ideas on how to lower student loan debt
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