How to Avoid the Stranglehold of Too Much Student Loan Debt

The truth about college is that you can't always attend the one you want. Tuition, fees, and room and board can stand as roadblocks.

Many parents and students grapple with whether a particular school costs too much. Usually, the question surfaces when student loans enter the college financing discussion.

"You always want to borrow as little as you can, as slow as you can, because you're never sure of what's going to happen," says Mike Sullivan, former director of education for Take Charge America, a national nonprofit credit counseling agency in Phoenix.

The decision of how much you and your family can afford to borrow starts with researching schools.

"It's based on a rule of thumb that your total student loan debt at graduation should be less than your annual starting salary."

STUDENT LOAN SEARCH: If you're weighing a private student loan, compare offers at Bankrate.com.

Make Sure You Know All Your Costs

You'll want to know if your tuition is locked in for all 4 years, if grants and scholarships are available, and if the financial aid is for a year or all 4 years. Many small colleges entice students by front-loading grants and aid during freshman year and dropping them sophomore year.

Tuition, fees and room and board are just a start. You'll want to know the costs of campus life, entertainment and transportation.

"Obviously, school supplies are not something to forget about either, because books and other supplies can be very expensive," says Tim Lavelle, founder of the website ForgetAboutStudentLoanDebt.com.

Pay Off Your Loan in 10 Years

Nate and Heather Comerford, who blog at "HackingYourBudget.com," tried to borrow only what they needed. But during one semester, Heather was offered a $5,500 loan which left her with a few hundred dollars extra.

In hindsight, Nate says they should have spent more time calculating their exact need rather than rounding up.

"Even if you have steady income after graduation, it's hard to understand how much a $500 loan payment eats into your budget," Nate says.

Mark Kantrowitz, publisher and vice president of strategy for Cappex.com, a college scholarship website, says there's a formula that people like Nate and Heather can use to calculate the student loan total they can afford.

"It's based on a rule of thumb that your total student loan debt at graduation should be less than your annual starting salary," Kantrowitz says.

If your total student debt is less than your annual income, you should be able to pay back your loan in 10 years or less. If it exceeds your income, you're likely to struggle to make loan payments. You may need to extend your repayment program by stretching out the term and reducing your monthly payment.

Loans Impede Life Events

There's a sense that if you graduate with too much debt, it can delay events such as getting married, having children, buying a house, saving for college and saving for retirement.

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That's why Kantrowitz recommends keeping student debt to less than annual income. By devoting 10% of income to paying off the debt, it can be retired in 10 years, and "they won't necessarily need to delay another of their various life cycle events," Kantrowitz says.

Federal Versus Private Student Loans

Once the touchy preliminaries are out of the way, there's the question of what type of loan to apply for. Kantrowitz starts with the 2 primary types of student loans -- federal and private:

"Federal student loans are cheaper, they're more available and have better repayment terms than private student loans. The federal student loans have public service forgiveness; private student loans don't. Federal loans have a fixed rate; private loan come with variable as well as fixed rates.

"Federal student loans are made without regard to a student's credit," Kantrowitz says. "The private student loans look for an adverse credit history, but they're not looking for future ability to pay. They're only looking at past financial difficulty."

So, federal loans are better, right? Not necessarily.

"If you have a very good to excellent credit rating, you can get a lower rate. as much as 1 1/2 percentage points lower. on a private student loan," he says.

COMPARE OFFERS: If a private student loan is part of your college financing plans, consider the rates today at Bankrate.com.

Types of Student Loans

Subsidized Stafford Loans: Federal loan for students who qualify based on need, using the FAFSA. Interest does not accrue while the student is in school.
Unsubsidized Stafford Loans: Federal loans available to any student, regardless of need, with which interest accrues while the student is in school.
Perkins Loans: Federal student loans based on need, in which the school is the lender.
Parent Loans: The Parent Loans for Undergraduate Students, or PLUS loans, cover any costs not already covered by the student's financial aid package. Parents are responsible for payment.
Consolidation Loans: These loans combines several federal student or parent loans into one bigger loan from a single lender.
Private student loans: These loans are offered by private lenders. They can help students who do not qualify for federal loans or who do not receive enough funding to cover the cost of college.
State loans: Student loans offered by the recipient's home state.
Institution loans: Student loans offered by the college being attended.

Sources: FinAid.org, StudentAid.ed.gov, National Foundation of Credit Counseling

Alphabet Soup of Student Aid

Comparing the numbers and provisions of student loans can be mind-numbing, and finding help with understanding it all can be difficult.

"There's an alphabet soup of acronyms like FAFSA, SAR, EFC," Kantrowitz says. "If you don't know what SAR is, it might sound like bird flu."

Those terms stand for Free Application for Federal Financial Aid, Student Aid Report and Expected Family Contribution.

Where to Go for Help

High school guidance counselors struggle to keep up. The ratio can be 200 to 500 graduating seniors for each guidance counselor. Online help is available.

CollegeGoalSundayUSA.org and FAFSA.ed.gov can help you fill out the FAFSA forms. StudentAid.ed.gov and FinAid.org teach basics of financial aid, including loans.

But Lavelle (of ForgetStudentLoanDebt.com) says you may have to rely on online personal budget calculators and student loan calculators, including those at Bankrate.com, to figure out your costs and how to keep up with them.

You usually have a 6-month grace period after graduating to begin paying your student loan. If you can't match your student loan with your income after college, it can literally take the food out of your mouth.

Brad Lubken, founder of MyMoneyProMVP.com, remembers trying to invest money and pay off his loan at the same time after college. He finally gave up investing when he realized he wasn't keeping up with his loan payments.

"I also limited the number of times I ate at restaurants each month to pay more toward my loan. I even went to the extent of buying generic brand groceries," Lubken says.