Despite Worries About Student Loans, Many Borrowers Have No Plan for Repaying Debt

The majority of young adults, college students and parents are worried about the rising cost of college, but do not have a plan to manage and pay down student debt, according to a survey released by Citizen’s Financial Group Inc., based in Providence, Rhode Island. The survey asked 5,000 adults between the ages of 18 and 34 about their perceptions concerning educational financing.

According to the survey, "While 83% of current students believe college is a worthwhile investment, 41% are concerned this investment will negatively impact their overall financial stability in the future." More than 70% of students surveyed indicated they believe the cost of college will impact their ability to buy a home. In addition, 54% of students’ parents said they were concerned about their own financial stability, especially their ability to retire.

But, only 63% of students and 55% of those parents said they have a plan in place to manage the education loans that they have borrowed to help pay for school.

There are proactive steps students and families can take to minimize and repay educational debt. Figure out how you will repay the student loans before you borrow, as it is easier to reduce debt before it is incurred than afterward.

  • Save as much as possible before enrolling in college. Every dollar you save is a dollar less you’ll have to borrow. Every dollar you borrow will cost about two dollars by the time you repay the debt, so it is worthwhile to save even when the student is about to enroll in college.
  • Exhaust sources of free money first, such as grants, scholarships and education tax benefits, before turning to student loans. File the Free Application for Federal Student Aid (FAFSA) and start searching for scholarships as soon as possible.
  • Enroll in a less expensive college. Compare college costs using the net price, since debt at graduation correlates strongly with a college’s net price. But beware of taking a detour through a community college, since students who start off at a 2-year college are much less likely to get a Bachelor’s degree.
  • Budget before you borrow. Increasing awareness of spending helps students exercise restraint and reduce the need to borrow. Otherwise, students often treat loan limits as targets because they lack insights into how much student loan debt is reasonable.
  • Consider using tuition installment plans as an alternative to long-term debt. Tuition installment plans spread out college bills into 9-12 monthly installments that may be more affordable than a single lump sum payment.
  • Keep student loan debt in sync with income. Total student loan debt at graduation should be less than the student’s expected annual starting salary, and, ideally, a lot less. If total debt is less than annual income, the borrower will be able to repay his or her student loans in ten years or less.
  • If you must borrow money for college, always borrow federal first, because federal student loans are cheaper, more available and have better repayment terms and conditions than private student loans.
  • When borrowing from private student loan programs, add a creditworthy cosigner to increase the odds of approval and reduce the interest rate, but beware the risks of cosigning student loans.
  • Sign up for auto-debit. Not only does repaying student loans through automatic monthly transfers from a bank account reduce the likelihood of being late with a payment, many lenders reward auto-debit with an interest-rate reduction, typically 0.25% or 0.50%. This can save the borrower hundreds of dollars in interest over the life of the loan.
  • Claim the student loan interest deduction. Borrowers may deduct up to $2,500 a year in federal and private student loan interest on their federal income tax returns, saving hundreds of dollars.
  • Accelerate repayment of the loan with the highest interest rate. There are no prepayment penalties on federal and private student loans. Targeting the most expensive loan for quicker repayment will save a lot of money.
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