If you are a young student caught up in the excitement of going off to college, your hubris may prevent you from seeing the implications of the Student Loans for which you are applying. So, remember these two rules and let them guide you in your decision:
1. Only get Federal Loans; do not sign up for Private Loans– When you are applying for loans, it may not seem to make a difference whether you sign up for Federal or Private Loans. But, here are the facts- Federal Loans have all kinds of Forgiveness Programs and Income Based Repayment Programs that will allow you to terminate your debt early under certain circumstances- this would apply, for example, if you take a government job, work for a non-profit company or become disabled. If your income after you finish college is not at Donald Trump type levels, with Federal Loans, you may be able to reduce your monthly payments under programs known as Income Based Repayment (IBR) or Pay As You Earn (PAYE), which is based on your net income after household expenses. These are huge benefits that can help you manage your monthly payments and total payouts.
Private loans may have some of these programs on a short term basis. However, there is no requirement that these benefits be offered to you, so you are subject to whims of the individual creditor and the person handling your account.
2. Do not put your parents on your Student Loans- I know your parents want to help you in the next stage of your life. This is very admirable, but you are the one going to college. I understand that they helped you get your first car loan, but that was for only five years whereas Student Loans can last for 25 years. I have a friend who told me that, by signing for his daughter, he lowered the interest rate by one-half a percent. That is wonderful, but, if his daughter is unemployed at some point in the next 25 years, does he really want to pay these loans when he is retired? This is an example of that old adage that “No good deed goes unpunished”.
I realize only using Federal Loans and not having your parents co-sign may force you to reassess what school you attend. You may be forced to stay local and not go to your “Dream College”. But, really, if you want to live in Boston, or Santa Barbara, for example (and who wouldn’t), get your degree and then move to your “Dream Town” and find a job. You may not have the chance to live in that really cool Frat House at that “Dream College”, but, for the amount of your Student Loans, you could put a significant down payment on your own Frat House after you graduate. Wouldn’t that be really cool?
If you have any questions about these two rules, email me at firstname.lastname@example.org.