How to Minimize Student Loan Debt

Live like a student while you are in school, so you don’t have to live like a student after you graduate.

Students who graduate with too much debt tend to delay important life-cycle events, such as buying a car, buying a house, getting married, having children and saving for their own retirement. They feel pressure to take the job that pays better, instead of the job that is a better match to their career goals. They may even be forced to adopt an austere lifestyle and to move back in with their parents. Every additional dollar of student loan payments is a dollar less for other priorities.

There are several ways of reducing the amount of student loan debt.

• Exhaust sources of free money, such as grants and scholarships, before turning to student loans. File the FAFSA (Free Application for Federal Student Aid) and start searching for scholarships ASAP.
• Save as much as possible before enrolling in college. Every dollar you save is a dollar less you’ll have to borrow. It is cheaper to save than to borrow. For example, saving $100 a month for 10 years at 6.8% interest yields $17,216. Borrowing instead of saving, however, will require payments of $198 a month for 10 years at 6.8% interest, almost twice as much.
• Enroll at a less expensive college. Compare colleges based on the net price, the difference between the total cost of attendance and just the grants and scholarships. This is the amount of money the student and his/her family will have to pay from savings, income and loans. The higher the net price, the greater the debt.
  • Enroll at an in-state public college. Students who receive a Bachelor’s degree from an in-state public college graduate with about 20 percent less debt than students who graduate from a private non-profit college. The rate of return on a college investment is also highest at in-state public colleges, due to the lower cost. Most public colleges offer a high quality education at bargain prices.
  • Enroll at a college with a "no loans" financial aid policy. There are about six dozen elite colleges with generous financial aid packages that replace loans with grants. While students can still borrow for the family’s share of college costs, the average student loan debt at graduation is much lower at these colleges.
• Use a tuition installment plan instead of long-term loan debt. Tuition installment plans split the college bills into 9-12 equal monthly installments for a nominal up-front fee and no interest.
• Students should budget before they borrow. This will help them borrow just what they need and not treat loan limits as targets. Increasing awareness of debt will help students exercise restraint and cut spending. 
• Students should also figure out how they will repay the student loans before they borrow, as it is easier to reduce debt before it is incurred than afterward.
• About half of college costs at public colleges are living expenses, not direct costs. These offer many opportunities for savings.
  • Textbooks. Students can buy used textbooks, rent textbooks or sell textbooks back to the bookstore at the end of the academic term to save about half of textbook costs.
  • Room and Board. Some students can live at home with their parents to save on room and board. Students who live off campus in an apartment can get a roommate to split the rent.
  • Transportation. Students who live farther away can reduce the number of trips home from school. Instead of going home or on vacation during each of the four main breaks (spring break, summer break, Thanksgiving break and winter break), students can save hundreds or even thousands of dollars by going home just once a year. 
  • Miscellaneous Expenses. Students can economize on eating out and entertainment expenses.
• Students can work part-time during the term and full-time during the summer to earn money to pay for school. College students can earn up to about $6,000 a year without affecting their eligibility for need-based financial aid.
• Pay the interest during the in-school and grace periods to keep the loan balance from growing. This is more important for private student loans than for federal student loans due to differences in the way accrued but unpaid interest in capitalized (added to the principal loan balance). Accrued but unpaid interest on federal student loans is capitalized once, when the loan enters repayment. This means interest isn’t charged on interest (as opposed to principal) until the loan enters repayment. As a result, it is more important to reduce new debt than to pay down the interest balance on a federal student loan. With private student loans, interest is capitalized more frequently and some lenders reduce the interest rate if borrowers pay the interest during the in-school period, so borrowers may be better off paying the interest as it accrues.
• Graduate on-time. Each additional year of study adds an additional year of debt. Don’t transfer to another college or switch academic majors, as this can add a term or two to the college career. Plan a path from college matriculation to graduation, considering prerequisites and when each class is offered. 
• 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 student loan debt is less than annual income, the student should be able to repay his or her student loans in ten years or less. If total debt exceeds annual income, the student will struggle to repay the debt and will need alternate repayment plans, like extended repayment and income-based repayment, to afford the monthly loan payments. But, these repayment plans reduce the monthly loan payments by stretching out the term of the loan, increasing the total loan payments. For example, increasing the repayment term from 10 years to 20 years cuts the monthly payment by about a third, but more than doubles the total interest paid over the life of the loan. Increasing the loan term also means the borrower will still be repaying the borrower’s own student loans when his or her children enroll in college.

After college, there are other tips for reducing the cost of student loan debt.

• Target the highest-rate loans for quicker repayment. There are no prepayment penalties on federal and private student loans. So, after making all of the required payments, make an extra payment and ask the lender to apply it as a payment to principal on the loan with the highest interest rate, not to a future loan payment.
• Many lenders offer a slight interest rate reduction of 0.25% or 0.50% to borrowers who sign up for auto-debit, where the monthly payment is automatically transferred from the borrower’s bank account to the lender.
• The student loan interest deduction allows up to $2,500 in federal and private student loan interest to be deducted on federal income tax returns.