Rules For Taking Out and Paying Back Student Loans

For many, student loans are the first item on the credit report, and as such, they can help set the tone for your borrowing life. Start on the right foot with these tips.

No matter which way you slice it, the numbers aren’t pretty: Two-thirds of college students take out some sort of loan to pay for their education. Numbers released this fall confirm that they are graduating with an average of $29,939 in student loan debt. And if they are attending a private college, they are paying around $37,000 per year.

With that said, I think that a college education is extremely important, and you shouldn’t let sticker shock scare you away. You just need to be a little more careful about how you borrow — and how you pay it back, as well.

The way I see it, there are certain things you can do before, during, and after college to ease the financial burden. I believe that if you follow these rules, you can get a great education without taking on great debt:

Set a limit. Mark Kantrowitz, one of my most trusted financial aid sources and the publisher of, has a couple rules of thumb for borrowing. The first is to make sure that the total amount you borrow for college is less than your expected starting salary. If you’re going to be a neurosurgeon, you can borrow a bit more (in fact, let’s be honest – you likely won’t have a choice). But if you wants to be a writer, your borrowing will need to be more conservative. If an expected starting salary is too nebulous of an idea for you, try Kantrowitz’s second rule: Don’t borrow more than $10,000 for each year you’re in school.

Prioritize. Pay or borrow in the reverse order of the cost to you. What does this mean? First, look at scholarships (more on this in a second). Then, go to your 529 account or other savings that you have developed specifically for paying for college. Then look at subsidized loans — they are federal loans that have a lower interest rate (3.4% if you borrow between July 1, 2011 and June 30, 2012) that doesn’t accrue while the student is in school. After you’ve exhausted these three options, look at unsubsidized loans. These loans have a rate of around 6.8%, and the interest does accrue during college years. Your next federal option is a PLUS loan, which carries a fixed interest rate of 7.9%, is borrowed by the parent – not the student – and has a repayment period that typically begins when the loan is fully disbursed. Private loans come last.

Look for scholarships. I’m sure you know that you can apply for scholarships during high school, but don’t stop your search if you’re one or two years into your Bachelor’s degree. and are great resources for finding scholarships for almost any category. Most importantly, don’t neglect small local scholarships offered by rotary clubs or other community organizations. Many students forget these exist, and having them on your resume can help you win larger scholarships.

Zig when everyone else zags. It’s not a popular move, but it is possible to make some payments while you’re still in school. For unsubsidized loans, the interest is accruing every day you’re hitting the books. It can be frustrating to look at a small, $2,000 loan and see that, by graduation, there is already about $200 in interest on that loan (depending on the rate, of course). Kantrowitz’s advice? Pay off the interest while you’re still in school. “If you don’t pay the interest during the in-school period, your debt will be 15-20% higher than the amount you borrowed,” he told me. “So simply making payments while you’re in school — even if just on the interest — you’re going to be saving substantial money.”

Maximize your grace period. No, I don’t mean extend the grace period — though I’m sure many college grads would like more than six months’ grace to get their finances in order. What I mean is this: if you have subsidized loans, use the grace period to plan. Research your payment options. All loans have a ten-year payback period, but if you have a meager salary (or don’t have a job), you can sign up for an income-based repayment plan on federal loans. This caps your payments at 10% of your income over a period of 25 years. Sign up for direct deposit and online payments — you might even get a slight break on your interest rate for doing this. And most importantly, if you’ve moved, make sure the lending company knows your new address. This sounds simple, but is actually quite important. Kantrowitz told me that the one payment that students miss the most is the first payment — either because they’ve forgotten to mark their calendars or because their mail is still going to their parents’ house.

Be aware of tax breaks. Specifically, be aware of the student loan interest deduction: students can deduct up to $2,500 they’ve paid in student loan interest over the year. Obviously, you can only deduct $2,500 if they’ve paid $2,500, but every little bit helps.

Understand forbearance and deferment. All federal loans offer these options, and many private loans do as well. Deferment is a temporary suspension of loan payments for specific reasons: unemployment, financial hardship, etc. If you have a subsidized federal loan, interest will stop accruing during deferment; if you don’t, it will continue to add up. Forbearance generally comes into play if you’re not eligible for deferment, and it works in much the same way—your loans will be temporary postponed or payments will be reduced. No matter what kind of loan you have, interest will continue to accrue. Generally forbearance and deferment will be granted for a set period of time, and many private lenders charge a fee for the service. These are last resorts and should be treated as such.

Pay as much as you can. It’s hard to wrap our brains around paying more than we have to. But if you can afford to make a payment that is more than the minimum, you don’t have credit card debt that needs paying and you can meet your other living expenses, you’ll save money on interest. And if you do decide to pay extra on your student loan, make sure you let the lender know that you are applying the extra payment to the principal amount — otherwise, it will be treated like it’s the next month’s payment.

Jean Chatzky

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