The Do's and Don'ts of Student Loans for Parents

Written by Sam Coveney, Intern, Shepherd Financial Partners

Congratulations! Your child is entering a very exciting part of life; college, independence and adulthood are on the horizon. Often times, in order to make college dreams a reality, young people must take out substantial student loans to finance their education. Taking on student debt can have many consequences that should be considered carefully before making a commitment to attend a specific college.

Teenagers and their families are often dazzled by the presentations and opportunities offered by colleges and often put the student loan decision on the backburner. Then, once graduation comes along four years later, students are faced with debt that they cannot afford. Loan payment is a major determinant of your credit and will effect your ability to borrow to finance future aspirations later in life. That is why it is important to stay diligent, and put time into the student loan process. Listed below are some “Do’s and Don’ts” of student loans to consider.

Do’s

• Apply for scholarships and grants – According to a Sallie Mae report1, “free money” such as scholarships and grants fund 30% of college costs. There are many more scholarships and grants available than you would think.
• Max out Federal Loans before Private Loans – Federal loans generally have better rates, better repayment options and qualify for more restructuring and consolidation benefits. Fill out the FAFSA for an estimate.
• Consider a career in public service – Most public service jobs contain federal loan forgiveness, which can be a lifeline for those struggling to repay large amounts of debt.
• Actually obtain a degree – It is important to remember why people attend college in the first place - college graduates, on average, earn much more over their lifetime than people with high school diplomas. The most important reason your child is going to college is to secure their future. Be sure that they graduate!
• The quicker, the better – A fifth year of college means another round of loans, which means more money that needs to be eventually repaid.
• Plan a career that earns enough money to repay the loan – The general rule of thumb is to take a job where monthly loan payments do not exceed 15% of your monthly income. If payments do exceed this amount, basic living expenses and financial goals are infringed upon.
• Consider work-study or part-time jobs while still in school – Being a student can be hard enough, and is considered by many to be a full-time occupation in itself. But getting a part-time job while in school, or finding a way to earn some money only helps after graduation when savings can go towards helping to pay those loan bills.
• Consider your repayment options – Obviously, if you can afford it, structure a loan for as little time as possible. This gets the loan out of your life quickly, and you end up paying less interest over the long run, albeit with a slightly higher monthly payment.
• Apply for and max out state loans – Massachusetts, for example, offers up to $20,000 lifetime in loans and offers no interest options.
• Make interest payments while still in school – Paying the monthly interest that private companies tack on reduces the compound interest that accrues over time, which reduces the overall amount due at the time of graduation. In most cases, the monthly interest rate is very affordable.

Don’ts

• Accept a loan where there is an “early repayment” penalty – Many private loan companies include this fee to dissuade families and individuals from making payments before graduation. With the vast number of loan options available, never settle for this penalty. Obviously, if there are savings leftover, paying the loan early or making a payment towards the principal is advantageous and lessens the monthly payment after graduation
• Take more money than you absolutely need – Student loans generally have a high interest rate, and that rate continues to trend upwards. A loan should therefore be taken out only to pay off the cost of tuition and the cost of living in college. Any extra money taken out is only hurting you over time. Using a student loan to pay for spring break, for example, may seem to be a good idea, but makes for an extremely expensive vacation.
• Defer payments unless it is absolutely impossible to pay – Deferments only delay the inevitable and, often times, students only have the option to defer once or twice. Save these deferment periods for times when it is absolutely necessary, such as unemployment or a period of financial hardship. Delaying payments for convenience is not practical, and you should always pay the debt if it is possible.
• Default – Defaulting trashes your credit score and the student loan must still be paid in one way or another. Talk to your creditor and find a solution.

Taking on student debt is a big deal; it is very important to manage student loans effectively. Communication is key- download our paper below and talk with us to determine your best options.

Click here to download our whitepaper “Having the Talk about College Finances”: http://www.shepherdfinancialpartners.com/having-the-talkdiscussing-colle...

Sources

How America Pays for College. Rep. Sallie Mae, 2014. Web. 3 June 2015.

“Federal Student Loans for College or Career School Are an Investment in Your Future.” Studentaid.ed.gov. Loans. N.p., n.d. Web. 03 June 2015.

Dubis, Carla. “Student Loans Do’s and Don’ts - US Student Loan Center.” Student Loans Do’s and Don’ts. US Student Loan Center, 13 June 2014. Web. 03 June 2015.

Shin, Laura. “Taking Out Student Loans? Do It Right With These 8 Tips.” Forbes. Forbes Magazine, 19 Sept. 2013. Web. 03 June 2015.