Avoid The Trap Of Excessive Student Loans


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Alicia Munnell of MarketWatch reports on a disturbing trend of young adults and investing.  The combination of slow wage growth and rising tuition are convalescing together to make it difficult to save.  This will have implications into the future because saving early in the life cycle will pay big dividends when they retire due to the power of compound interest.

Here are some interesting facts from a survey done by The Institute for College Access & Success, a non-profit policy agency based out of Oakland, CA:

  • Over 2/3 of the 2011 graduating class will have some form of student loan debt.
  • The average amount of debt was $26,600.
  • These numbers are probably understated because the survey excluded more expensive for-profit colleges, whose respondents did not participate.

First, if you are about to attend college,  do not fall into the same trap.  Make sure to manage the student loan process effectively.  If you have exhausted all other sources of funding, including personal and family support, scholarship money, and grants, then student loans can be a viable option.  In this case, it is recommended that you examine federal loans first and only rely on private student loans as a last resort.  Check out the Consumer Financial Protection Bureau, which offers helpful information on all types of student loans.

Federal student loans offer lower rates and more flexible repayment options because these programs are subsidized by the government.  The most popular option are Stafford Loans, which offer fixed-rate loans at relatively low cost, and are available to all students.  They are available for both undergraduate and graduate students.  If you can demonstrate financial need, then the Federal Perkins Loan Program is a viable option that offers more generous repayment options than Stafford Loans.  With both loan programs, the most you can borrow is $5,500.

If you have exhausted all of the federal loan programs and still are falling short, then carefully investigate options for private lenders.  When assessing private sources, recognize that most of them offer variable rates, which means that changes in the market can result in interest rate rising in the future.  There have been instances where rates have gone up to 16%, which is extremely high.  Generally, they also offer less flexibility in repayment options.

Even though it is sometimes necessary to take out loans for living expenses, try to find effective ways to save money.  Citizens Bank offers twelve helpful tips to follow:

  1. Track where your money goes.
  2. Make a budget and follow it.
  3. Live like a college student, which means buy as little as possible.
  4. Don’t abuse credit and only use it in emergencies.
  5. Get in the habit of saving, even if it is as small as $10 a week.
  6. Keep it safe by tracking receipts and storing important financial statements in a secured place.
  7. Avoid impulse buying and focus only on meeting your needs.
  8. Improve your credit score by making timely payments.
  9. Be a cheapskate and take advantage of free food from student activities.
  10. Utilize your student status around town where you can receive discounted prices on items.
  11. Consider taking a part-time job for extra cash, but only if you can manage it academically.
  12. Never buy textbooks new and be proactive in getting used textbooks online.

Even though the job prospects for a college graduate is much higher than a high school graduate, be cautious about loading yourself down with excessive debt early in their life.  Be aware that student loan debt now exceeds credit card debt.

Learn from the mistakes of current college graduates by adjusting your expectations.  This might mean delaying leaving your parents’ home.  It might involve delaying purchasing a house and restraining your spending habits.  By doing this, you will pay off your debt quicker and build up your savings.

Be strategic in avoiding the trap of over-indebtedness and learn to enhance your wealth, rather than drain it.

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One thought on “Avoid The Trap Of Excessive Student Loans

  1. Pingback: Community Colleges versus 4 Year Schools: Thoughts on How to Transfer Credits | lablouisianaboy

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