The Smarter Way to Borrow for College
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The Smarter Way to Borrow for College

The headlines are alarming: Borrowers are defaulting on student loans at the highest rate in 20 years, and millennials burdened with too much debt may be pushing off marriage and home ownership because of their debt loads. Student loans are the fastest growing category of consumer debt.

It’s enough to make some people question the value of college at all. The answer, research shows, is overwhelming: Yes, college is worth it. Students with a college degree make an average of $18,000 more annually than their peers without one.

Related: Why Easy Student Loans Are a Moral Hazard

There’s less consensus, however, on the value of an expensive degree versus an inexpensive one, especially if getting the pricier degree requires taking on a substantial amount of debt.

Students who graduate with untenable debt loads become a drag on the economy, as those loans may keep them from building up the savings needed for financial security.

The national average debt load for graduates in 2013 was $28,400, 2 percent higher than in 2012, according to a recent analysis by the non-profit Institute for College Access and Success. The report found that seven in 10 college seniors had loans at graduation.

That’s why it’s important for students (and their parents) to carefully consider how much they’re borrowing to pay for college and to borrow that money in the smartest way possible. Follow these steps to ensure you’re making the best decisions on student loans.

ONE: Make borrowing a factor during college selection.

Students should borrow no more for their college degree than their projected first year’s income after graduation. Find an income estimate via and use a net price calculator to determine how much you’ll actually have to pay (usually a lot less than the sticker price) to go to the college of your choice. See how the net price compares to your college savings to see how much you may need to borrow. If you’ll be left borrowing far more than your projected income – you may not be able to afford it.

Related: Student Loans Get the Boot at This Elite School

“Students often start their search for schools based on things like location, faculty, and extra curriculars,” said Megan McClean, director of policy and federal relations for the National Association of Student Financial Aid Administrators. “Cost and affordability also need to be part of college fit.”

TWO: Start with federal loans.
Limited to $5,500-$7,500 per year, federal student loans don’t require a cosigner and typically offer more flexible repayment terms than those available via private lender. If graduates have trouble paying these back, they may be eligible for income-based repayment programs; workers in public service could even have part of their loans forgiven after 10 years of on-time payments. Many Americans struggling to cope with student debt could get relief from debt repayment programs —but they either don’t know about them or aren’t aware that they qualify.

“Always exhaust federal loans first, even if the parents plan on helping students pay them off,” said Kathy Ruby, a college finance expert with admissions consultant College Coach. Added bonus: Paying off the loans helps student build credit.

THREE: Consider the risks of private loans. 

Most students are eligible for a total of $27,000 in federal loans. If you decide you need to borrow more, consider private loans or federally backed Parent PLUS loans.

Related: The $28,000 Debt Few American Grads Can Pay Back

Last year, about 20 percent of new graduates with debt had some portion of that in private loans. To secure those, most students will need a cosigner (typically a parent) with good credit. Both parties are equally liable for the debt.

“The lender is really just doing a courtesy by billing the student for the loan,” said Mark Kantrowitz, who publishes the education resources site Edvisors Network. “If a student is late with one payment, that bill will immediately go to the parents.”

A rule of thumb for parents is not to borrow for their children’s higher education needs an amount that’s more than one year’s income or what they can pay off in either 10 years or before they retire, whichever comes first.

Private loans do not offer the repayment flexibility that comes with federal loans, and some do not automatically discharge upon the death or disability of the student. Last year, the number of complaints about private student loans increased 38 percent, according to a report last month by the Consumer Financial Protection Bureau.

FOUR: Take a hard look at your financial aid package. 

Merit scholarships and work-study programs can help offset the amount you’ll need to borrow. In addition to scholarships offered by the college, look for academic scholarships offered by community organizations or at the state level.

Related: Pros and Cons of Paying Off Student Loans Early

It’s worth appealing to a financial aid officer to see if he or she can shift the dollars in your aid package. If, since filing the FAFSA, your family has had a job loss or a medical situation, for example, sharing that information with the financial aid office might change your award. 

If you’ve received multiple aid offers from different colleges, you can share them with competing colleges to see if they’ll match the other institutions’ offers.

Remember, you don’t have to take the full amount of loans offered in a school’s student aid package. “The interest on money you don’t absolutely need accumulates,” said Kristina Tirloni, a spokeswoman for TG, a nonprofit that helps students in Texas plan and prepare for college. “Send it back to the financial aid office and just take what you need.”

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