Getting a college degree can be an excellent investment in your future, but if you aren’t careful, loans you take out to obtain that degree can act as a financial drag for years after graduation.
A recent U.S. Department of Education study found that 11.3% of students at postsecondary schools who were scheduled to begin paying their loans in fiscal year 2013 were in default by the third year of repayment. While that was a better rate than in previous years, overall levels of student debt are rising. As of June, students held $1.36 trillion in debt, up from $961 billion in 2011, according to the Federal Reserve Board.
When you’re starting out
1. GET TO KNOW THE FAFSA
Filling out the Free Application for Federal Student Aid will help determine the out-of-pocket cost of attending college and the necessary family contribution. The FAFSA is the primary form that the federal government, states and colleges use to award grants, scholarships, work study and student loans to help reduce the overall cost of college and student loan debt.
– Chris Burford of Clearpoint Credit Counseling Solutions in Jackson, Mississippi
2. DON’T BORROW MORE THAN YOU NEED
Understand all your options for paying for college and don’t just take out the maximum allowable student loans every year. Families can benefit by working with someone who specializes in developing college planning strategies that incorporate college selection, financial aid and tax aid.
3. WATCH YOUR LOAN-TO-INCOME RATIO
A good rule of thumb is to borrow at a 1-to-1 ratio to your expected income after school. If you expect to make $35,000 your first or second year out of college, don’t take on more than $35,000 in debt. This rule doesn’t hold true for some professions, like doctors, who see a substantial jump in salary after residency.