Here's How to Limit Your Educational Debt


If you or your child plans to attend a four-year college or university, chances are you'll have to take out a loan to do it. The Project on Student Debt, a student debt research nonprofit, reports that 67% of students attending four-year schools turn the tassel with debt, the average of which is $25,250.

Mary Harper, director of student financial assistance for the University of Southern Indiana in Evansville and head of the school's Eaglenomics financial literacy program, says students can prevent the debt from becoming a problem by taking a few simple steps. Here's how to ensure you'll be able to pay back student loans after graduation.

Reduce the Borrowing

Every dollar students borrow, whether from student loans or by credit card, will cost them, says Harper. While students can't control the price of tuition or how much they receive in financial aid, they can minimize spending on amenities such as food, entertainment and transportation.

"You cannot file bankruptcy on federal (student) loans at this point. It's just wise to teach students to be careful with planning and to manage debt while they're in school," she says.

That means educating underclassmen about the perils of credit card debt before they make unnecessary charges and informing upperclassmen about creating and maintaining a budget. Harper adds that students can also reduce debt by getting a part-time job while in school and making payments to the institution instead of borrowing.

"We are not recommending that our students work more than 20 hours a week," she says.

Research by the nonprofit think tank Public Agenda shows that balancing school and too many hours of work is the No. 1 reason students drop out of college.

Take Federal Loans First

Federal loans usually can't be dismissed in bankruptcy, but they do come with certain borrower protections that aren't guaranteed on private student loans.

"Typically (federal loans offer) a lower interest rate for students, and should the student incur any type of financial problems, they do have an option to apply for a forbearance of payments," says Harper.

Federal Stafford loans for the 2011-2012 school year have a fixed interest rate of 3.4% on subsidized loans for undergrads and 6.8% on unsubsidized and graduate student loans, according to the Department of Education. Federal Perkins loans for qualifying low-income students have a fixed 5% interest rate.

On top of costing less than most private loans, federal loans also come with deferment and forbearance options, the ability to cap monthly loan payments according to the graduate's income and the option to have federal loans forgiven after 25 years of consecutive payments.

Seek Counseling

The problem with federal student loans is that students are limited as to how much they can borrow per year. The Department of Education currently allows all dependent undergrads to borrow $5,500 for their first year of college, $6,500 for their second, and $7,500 for their third year and beyond. They can borrow an extra $4,000 for additional undergrad work through the Stafford loan program. Independent students can currently borrow up to $57,500 over four years.

The catch is that many four-year institutions cost more than the borrowing limits. The College Board reports that the average cost of tuition and fees at a public in-state four-year institution, without factoring in room and board, is $8,244 for the 2011-2012 school year. For an out-of-state student, that figure rises to $12,526.

"(Students) should come to the financial aid office to determine what their loan options are with private lenders." says Harper. "... We don't recommend one lender over the other, but we do point out what to look for in terms of interest rates and repayment options and grace periods once they graduate."

Prepare for the Job Market

The easiest way to pay off student loans is to land a job quickly after graduating.

"Our career counseling center certainly assists students in finding employment," says Harper. "We encourage them to attend job fairs. We encourage them to seek out opportunities within the community and to attend as many functions as they possibly can to secure employment."

Students can also get a leg up on the competition by gaining work experience while in school. Internships, externships, cooperative learning programs, job shadowing days, research projects, summer jobs and fellowships all provide invaluable learning experience and industry contacts that can be mined when moving into the working world. In recent research, nearly 58% of interns interviewed were given jobs once their internships were finished, according to the National Association of Colleges and Employers.

The key to landing a job is to start the search early and use campus resources, including career centers and alumni networks, to research potential opportunities.