July 20, 2015 1:30 am
1. Exhaust free money first. By the time loans are repaid in full with any interest, it typically costs students about two dollars for every dollar they borrow. Rely on free aid first, such as grants, scholarships and education tax benefits. Consider earned income, such as student employment, education awards for volunteer service, employer tuition assistance or military student aid as options, as well. If you must borrow, consider a short-term tuition installment plan, instead of long-term debt.
2. Avoid taking on too much debt. Families should only take on as much debt as they can afford to repay student loans in ten years or less. A good rule of thumb is to keep student loan debt at graduation less than the student’s expected annual starting salary – ideally, a lot less.
3. Borrow federal student loans before private ones. Always borrow federal student loans first because the loans are less expensive, more available and have better repayment terms and conditions than private student loans.
4. Know the difference between fixed and variable interest rates. Fixed interest rates remain unchanged for the life of the loan, while variable interest rates may change periodically. Even if the interest rate on a variable-rate loan is initially lower than the interest rate on a fixed-rate loan, the variable-rate loan may ultimately be more expensive if the interest rate increases significantly over the life of the loan.
5. Understand the consequences of cosigning. Cosigning a loan may help the borrower qualify for a loan and may reduce the interest rate. But, a cosigner is also a co-borrower, equally obligated to repay the debt. The cosigned loan will be reported on the credit history of both the borrower and cosigner. This may affect the cosigner’s ability to qualify for other debt, especially if the borrower is late with a payment or defaults on the loan.
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