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Ben Mulling

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Who's Footing the Bill?

Posted: 08/28/2012 10:05 am

According to the Federal Reserve Bank of New York, the average student debt has risen over 55 percent since 2005. At that time, the average student loan balance was around $15,651 compared to $24,301 in 2012. Furthermore, the number of people borrowing funds to pay for college has tripled over the past seven years to a whopping 37.1 million borrowers!

Some people argue that this is simply due to the rising cost of college tuition or more people going to college, which can be viewed as a positive trend. I tend to think that it is largely due to a cultural shift and how we pay for things in our country today. Debt is utilized in almost everything we do. We use it to pay for cars, clothes and sometimes even our groceries. Of course, it would make sense to use it to pay for college tuition as well.

And now, colleges and financial institutions are even making it easier for students and their families to borrow funds for education. Many schools have even partnered with financial institutions to allow students to put excess loan funds on a prepaid debit card or their institution ID card to allow them to purchases additional "needed" education expenses. There definitely is a need for funding for college expenses, but as a country we are allowing student debt to get way out of hand.

So the ultimate question for any college student is, "How do I keep my student debt from ballooning?" Having graduated from college with very minimal student loan debt, there are a few things that worked for me that I can personally recommend for a college student.

Watch the Add-ons
If you have recently received financial aid, you know how the process works. You get an award letter that says how much loan you qualify for to use for college expenses. You then fill in the blank with the amount you want and the collegiate debt snowball begins to roll.

If you aren't careful, one can easily talk themselves into adding a little extra each term to cover things that we convince ourselves we really need. So you add an additional $1,000 to cover those extra expenses such as a new computer, a replacement backpack or a going back to school wardrobe upgrade. Before you know it, these add-on expenses can easily add up to more than $10,000 in additional debt over a period of 8 to 10 semesters. So remember to be disciplined when selecting your needed amount.

Try to only take a loan for what is needed for tuition, not what is wished for Christmas. Due to the compounding interest over the loan period, those new clothes, shoes or computers could end up costing you triple what you paid for them over the repayment period.

Don't be Afraid to Chip-in
Many students get jobs during the summer to help offset some of the cost of college tuition bills for the coming terms. However, your debt minimization strategy shouldn't stop at that. If you are intent on leaving college with as little student debt as possible, continue your work habits throughout the semester. Earning as little as a few hundred extra dollars per week during the term can really make a difference in lowering your need for financial assistance.

As you grow in college, part of becoming an adult also means making wise financial decisions that affect your future. That means you may have to give up a party or two, but your budget will thank you after graduation. Don't worry. Twenty work hours per week during the term won't destroy your GPA, contrary to public opinion. I worked full-time while going to college, and I can say that while I may not have had as much fun as other students, I was very happy with the lower payments following graduation, and made the early payoff of my school loans much more feasible. It also made me appreciate the effort that I put into the college experience due to some of the personal sacrifices that I had to make to achieve my desired results.

Make Your Interest Behave
How your interest behaves in the loans that you select will play a large role in your accumulated loan balance following graduation. Two primary types of school loans that you will most likely be offered are subsidized and unsubsidized interest loans.

Subsidized loans do not accrue interest as long as you are a full-time student in college. This means that your loan balance will only grow by the amounts that you actually borrow, and your student loan snowball will not grow as quickly. Unsubsidized loans, however, behave in the opposite manner. Interest on your loan amounts begins accruing at the time your loan is distributed to your school. This means that not only does your loan grow by the amounts borrowed, but also as the interests on those amounts are added throughout your college experience. Many unsubsidized loans give you the option of paying interest throughout your time in college, but few students actually make these payments and simply defer them into their primary loan balance. So when selecting your loan types, be sure you understand how the interest behaves for your selected loan.

It's OK to be Poor
You're a college student. By definition, that means that you are supposed to be poor. You bum food from your parents, aunts, uncles and cousins. You don't need new clothes, fancy phones, a nice car or the newest computer. Don't be afraid to purchase used textbooks, or better yet, rent your textbooks from online textbook sites. If you are an accounting major, I really doubt that you will ever reference your freshman American History class textbook at any time during your professional financial career. Ask yourself with every purchase, do I really need this? It's important that you not care what people think about you for not having the latest and greatest gadgets, gizmos and clothing -- by delaying these purchases until after college when you don't need to borrow to get them, you are becoming a responsible adult.

Many people will tell you to have fun while you're at college. Your friends and experiences will stick with you for the rest of your life. I agree with that as well. However, many people often fail to finish that concept. Not only do the friends and experiences stick with you, often the loan balances needed to finance those activities remain with college students for many years to come following graduation. Be sure to keep that in mind when deciding whether to take that extra money out on the award letter.

 

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