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Over the past few years, much has been written and discussed in the media concerning student loans. The following is written to help guide you through the complicated world of student loans and, I hope, give you a useful road map.

1. Take Advantage of “Free” Financial Aid First

Before considering loans in order to pay for higher education, first take advantage of all sources of “free” financial aid. Sources of “free” financial aid include grants and scholarships. They can come from the federal government, state government, your college/university or other scholarship organizations. You should start seeking out all sources of grants and scholarships as early as possible (as early as junior year in high school).

For most colleges or universities, you will need to fill out the Free Application For Federal Student Aid (commonly called the FAFSA). Many colleges and universities also have institutional aid applications, so check with the schools you are interested in attending. You should also seek outside scholarships from foundations and scholarship organizations.

Helpful Hints:

  • Get organized. Collect all of the information you will need for scholarship and financial aid applications so that it’s all in one place. Create a calendar with application deadlines and requirements for all of the scholarship and financial aid processes.
  • Do not overlook small and local scholarships. They tend to have fewer applicants ( in other words, less competition) and can really add up in helping you fund your education. To find these, go to your high school guidance counselor, check the ads in your local newspaper and ask the companies for which you or your parents work.

2. Know the Different Types of Loans

There are three different types of loans:

  • Federal Direct Subsidized and Unsubsidized Loans: The lender is the federal government. Currently these loans have a fixed interest rate (6.8{53c6eff5ce19621f7316832cfedf08caab022021f1679c62c3f44b8900ceaf72} for the 2013-14 school year) and charge an origination fee of 1.051{53c6eff5ce19621f7316832cfedf08caab022021f1679c62c3f44b8900ceaf72}. For subsidized loans, the federal government pays the interest while a student is in school; for unsubsidized loans, the student must pay the interest. The student is responsible to repay the loan, with a standard repayment period of 10 years.
  • Federal Parent PLUS Loans: These loans allow a parent of a dependent undergraduate student to borrow to assist that student; the lender is the federal government. Currently these loans have a fixed interest rate (7.9{53c6eff5ce19621f7316832cfedf08caab022021f1679c62c3f44b8900ceaf72} for the 2013-14 school year) and charge an origination fee of 4.204{53c6eff5ce19621f7316832cfedf08caab022021f1679c62c3f44b8900ceaf72}. A credit check is required to make sure that the parent does not have any adverse credit. The parent borrower is responsible to repay the loan starting while the student is either still in school or after her or she graduates.
  • Private or Alternative Loans: A private lender or credit union provides the funds for these loans. There is usually a credit requirement and often an undergraduate without sufficient credit and/or work history will need to have a credit-worthy co-signer. Some lenders offer variable-rate interest loans and others offer fixed-rate interest loans. The interest rate you receive will depend on your credit and/or your co-signer’s credit information. Any student considering a private or alternative loan should carefully consider all of the terms since each lender is different. Generally, there are less protections for students with these loans as compared to federal loans.

Helpful Hint: If you are considering a private loan, have a co-signer and shop around within a 30-day period to see which lender will offer you the best interest rate and terms. Students and their co-signers can find significant differences in the interest rates they are offered, so it often pays to shop around.

3. Interest vs. Investment

Loans need to be repaid. Federal and private student loans can rarely be discharged or forgiven. Even declaring bankruptcy will rarely get rid of student loan debt. You should think about student loans as paying for what you can’t afford right now at a later time, with an additional cost (called interest).

You might ask why anyone would consider loans. The reason you might take out loans is that additional cost (interest) you pay gives you future opportunities and increased earning potential. In other words, many students see that additional cost as a worthwhile investment in themselves (or, in the case of Parent PLUS loans, their children).

4. See the Big Picture

The most important consideration you must make when thinking about taking out loans is not the total amount you need to borrow for your first year of school, but the amount needed for the entire program or degree. You need to consider not only the cost per year, but the total amount of loans that you will have borrowed when you graduate. Too many students do not consider this and can quickly become overwhelmed with the total amount they have borrowed.

Helpful Hint: A good guide is not to borrow more than you expect your starting salary will be at your first job after graduation. for example, if you expect to earn $35,000 a year at your first job, you should certainly not borrow more than $35,000 in loans. Based on this guide, you will need to put around 10{53c6eff5ce19621f7316832cfedf08caab022021f1679c62c3f44b8900ceaf72} of your annual income toward loan repayment.

5. Do the Math

Doing the math is important when considering your school choice. The basics of the equation is to determine the total cost of attendance—not only tuition and fees, but also books/supplies, housing, food, transportation and personal expenses—and then subtract all “free” scholarships and grants from that total. This leaves you with the remaining amount a school will cost per year.

Next, consider payment plans, work/study earnings and savings that can be put toward that remaining amount. Finally, and only then, consider the different types of loans. After you figure out how much you would need to borrow per year, multiply that amount by the number of years it will take to complete your degree.

You can then use this final number to compare colleges and universities and decide if that number is worth your “investment.”