As more students are forced to borrow to pay for college, more students and parents are seeking ways to save money on their student loans. These tips discuss methods of cutting costs when seeking loans to pay for college and when repaying student loans.
The first step to cutting borrowing costs is to minimize the need to borrow. To cut borrowing costs in half, just borrow half as much. Borrow the least amount needed to bridge the gap between the net price of college (the difference between the annual total cost of education and gift aid) and the family’s financial resources. Keep student loan debt affordable by limiting total student loan debt at graduation to no more than the student’s annual starting salary.
Minimize the need for debt by economizing on living expenses. About half of college costs at an in-state public college come from room and board, textbooks, transportation and miscellaneous/personal expenses. Cut housing costs by living at home or by getting a roommate to split the rent. Save on textbooks by buying used textbooks and selling textbooks back to the bookstore. Cut the number of trips home from school. Live like a student while you are in school, so you don’t have to live like a student after you graduate.
Reduce the net price of college by enrolling at a lower-cost college or by maximizing gift aid. Gift aid is free money, like grants and scholarships, which does not need to be earned or repaid. File the FAFSA (Free Application for Federal Student Aid) to apply for federal and state grants. Search for scholarships for free at StudentScholarshipSearch.com and enter free scholarship drawings at ScholarshipPoints.com.
Tuition installment plans are a less expensive alternative to long-term student loan debt. They are best for families who can afford to pay the college bills, just not in one big lump sum. Instead, a tuition installment plan breaks up the college bills into equal monthly payments. Tuition installment plans do not charge interest, but do charge an annual up-front fee that is typically less than $100.
Borrow subsidized student loans before unsubsidized loans. The federal government pays the interest on subsidized federal student loans while the student is enrolled in college, during the grace period after graduation and during periods of authorized deferment. This can save a lot of money on interest. Subsidized student loans include the Direct Subsidized Loan and Perkins Loan.
The Direct Unsubsidized Loan is a federal student loan that is not based on demonstrated financial need. Interest accrues on unsubsidized loans from the time the loan is disbursed by the school. The interest is not paid by the federal government. Nevertheless, Direct Unsubsidized Loans are also a pretty good deal, especially for undergraduate students. The interest rates are low and fixed and do not depend on the borrower’s credit scores.
If the federal student loan limits are not enough, however, borrowers can consider the PLUS Loan, private student loans and private parent loans. Borrowers should shop around for the best interest rate and fees and the best mix of loan features. Private student and parent loans now offer fixed interest rates with no fees that undercut the PLUS Loan on price for borrowers with very good or excellent credit. But, they don’t offer the same benefits as federal loans.
Borrowers who don’t qualify for a private student loan can apply with a creditworthy cosigner. Lenders base eligibility and interest rates on the higher of the two credit scores. So, even if a student can qualify for a private student loan on his or her own, applying with a creditworthy cosigner may yield a less expensive loan.
Borrowers should sign up for auto-debit, where the monthly loan payment is automatically transferred from the borrower’s bank account. Many lenders offer a slight interest rate reduction, typically 0.25% or 0.50%, as an incentive to participate in this program. This can save as much as $300 in interest for every $10,000 borrowed, assuming a 10-year repayment term, and as much as $700 on a 20-year repayment term.
The student loan interest deduction is an above-the-line exclusion from income. Borrowers can deduct up to $2,500 in interest paid on federal and private student loans on their federal income tax returns each year, even if they don’t itemize. This can save as much as $625 per year, depending on the amount of interest and the borrower’s tax bracket.
To save the most money on interest, borrowers should pick the repayment plan with the highest monthly payment they can afford. This is usually the repayment plan with the shortest repayment term. With a higher monthly loan payment, a greater portion of each payment is devoted to paying down the principal balance of the loan. This leads to a quicker payoff of the loan and less interest paid over the life of the loan. For example, the total interest paid on a $35,000 loan at 6% loan is $11,629 on a 10-year repayment term, less than half the $25,180 in total interest paid on a 20-year repayment term.
A more refined version of this strategy is to accelerate repayment of the loan with the highest interest rate first. After making the required payments on all of the borrower’s loans, the borrower makes an extra payment on the loan with the highest interest rate. This will pay off that loan quicker, saving the borrower more interest over the life of the loan.
A private consolidation loan may save the borrower money if it results in a lower interest rate on the borrower’s student loans. Generally, a borrower’s credit scores decrease and interest rates increase with each year the borrower is in school. By the time the borrower graduates, the interest rates on private student loans have reached a peak. If the borrower manages his or her debts responsibly, making on-time payments on all of the borrower’s debts, not just the student loans, the borrower’s credit scores will improve within a few years of graduation. At that time, the borrower should be able to refinance his or her private student loans to obtain a lower interest rate.
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