Borrowing for College? Read This First!
Article and audio introduction by Samantha Kennedy, Family and Consumer Sciences
Interest Rates Have Dropped
Interest rates in federal student loans are decreasing an average of 0.5 percent for the 2019-2020 academic year. This may not sound like a lot, but depending on the amount borrowed, it could mean significant savings over the life of the loan.
Those taking out undergraduate loans will save the least, since the government limits how much an undergraduate student can borrow. The amount allowed depends on the year they are in school and whether they are claimed as a dependent by their parents. The maximum amount lent to an undergraduate student per year is $12,500.
Graduate students and parents, however, can borrow enough to cover the entire cost of school, which means that over the life of the loan, the lower interest rate could mean a more significant savings during repayment.
Keep in mind, however, that the lower interest rates only apply to new loans and not money that has already been borrowed. That means that unless the entire loan amount is refinanced or separate loans are consolidated, different loans will have different interest rates.
Make the Smart Choice
Borrowing money, even at lower interest rates, is an important decision that needs to be considered carefully. Here are a few things to think about before signing on the dotted line.
Never borrow more than can be afforded easily. Lower interest rates do not mean it is okay to borrow more than is needed. If possible, limit the total amount borrowed to less than anticipated gross annual income. Monthly payments should not exceed 10 to 15 percent of gross monthly income. Anything higher than this often means having to drastically cut spending in other areas.
A good rule of thumb is that if the total amount of student loan debt at graduation is less than the annual gross income of the person repaying the loan, then the debt should be able to be paid off in 10 years or less. Larger amounts will take longer to pay off, of course, which results in more interest being paid over time.
Remember, borrow only the amount needed to cover college expenses, not the entire amount offered.
Be choosy about lenders. Private lenders may offer very attractive interest rates at the beginning of a loan, but if their interest rates are variable, the interest may continue to rise through the life of the loan, making repayment more difficult. Federal loans, on the other hand, have fixed interest rates as well as flexible repayment plans to fit most budgets.
Practice Good Recordkeeping
Federal loans also do not require a co-signer or a credit history for the lender, allowing students to borrow on their own if they so choose. Taking out a federal student loan is also less risky for parents than borrowing from retirement savings or taking out a home equity loan.
Always keep good records, especially once the repayment period starts. Keep track of what kind of loans are outstanding, how much is owed, and which company is servicing each one. And of course keep records of every payment made in order to better track the repayment progress. Keeping multiple copies of each record – in both paper and digital format – in a safe place will help ensure a smoother repayment experience.
Borrowing money for college is an important financial decision that should not be undertaken lightly. With careful planning, student loan debt can be easily manageable and not a burden in the future.
For more information about college loans and loan repayment strategies, please contact Samantha Kennedy, Family and Consumer Sciences agent, at (850) 926-3931.
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