Borrow to pay for your studies? Focus on your needs, experts say

In what has become something of an annual ritual, students applying to US colleges this year will have to consider an age-old question: How can I pay for higher education without landing in the hole for years to come?

There’s no one-size-fits-all approach, but there are general principles that should guide all prospective undergraduates considering loans to fund their college education, according to financial aid experts.

“There’s a lot of noise right now about student debt” which is “very broad and not necessarily relevant to a student who hasn’t borrowed yet,” said Jessica Thompson, vice president of the Institute for College. Access and Success, a non-profit organization that works to increase the affordability of a college education.

If you have to borrow to go to college, she says, “stay really focused on what you actually need to cover.”

Nationally, the average sticker price at a public four-year college in the state — including tuition, fees, and room and board — was more than $22,000 during the 2021-22 school year, according to a College Board report on college awards. At private, nonprofit four-year colleges, the average cost was nearly $52,000.

There was some relief.

In August, it was announced that the US Department of Education would provide up to $20,000 in assistance to borrowers who have received federal student aid, called Pell Grants, and earn less than $125,000, or less than $250,000 for married couples. Those who reach income levels but were not Pell Grant recipients could see up to $10,000 in relief.

But many prospective students will likely take more than that amount to attend school.

Top financial concerns for students entering college include the types of loans they should explore, factors to consider when choosing their loan amount, and whether alternatives such as scholarships or grants could fill the void.

Here’s what the experts recommended in response to questions provided by the Post-Gazette:

How much should students borrow to pay for education?

As you might have guessed, it depends.

According to Melanie Hanson, editor of the Education Data Initiative’s Refinance Student Loans blog, different students need different amounts. For some, it makes sense to borrow what they need to cover classroom basics, such as books and tuition. For others, accommodation, meals and transportation costs may also need to be considered.

“In most cases, it’s best to only borrow what you’ll need to meet your expenses while in school,” Hanson said.

William Lindsey, Pennsylvania Schools Services Manager for the Pennsylvania Higher Education Assistance Agency, reviews financial aid details for a group of parents and students Sept. 8, 2022.

Steve Mellon, MBI / Steve Mellon/Post-Gazette

When projecting repayment plans and amounts, students and their families should consider how much they are expected to earn after graduation, which depends on the field of study they are entering.

If possible, some experts suggest trying not to borrow more than the expected starting salary upon graduation.

“I like this particular advice because it introduces the idea of ​​college as an investment, and it encourages people to think about how the school and major they choose will influence their earning power” said Michael Lux, founder of The Student Loan Sherpa, a website dedicated to student loan education.

Thompson said federal student loan limits — which include a lifetime cap of $31,000 for dependent undergraduates — provide “pretty decent protection against significant excessive borrowing.”

“If you’re able to meet the federal undergraduate loan limit, I don’t think borrowers should care,” she said.

And just because you can borrow an amount doesn’t mean you have to, Thompson reminded.

“You don’t have to borrow the maximum. Some schools incorporate the maximum available immediately into your financial aid package. You don’t have to take it,” she said. “Keep in mind that you are an active agent in this process.”

What type of student loan are preferable?

According to NerdWallet, 92% of student loans belong to the US Department of Education. Private student loans represent nearly 8% of total US student loans outstanding.

Experts have recommended that in between, students who rely on loans to fund their college education take federal loans and, where possible, avoid private loans.

“If you have to borrow, stick to federal student loans,” Lux said.

He added that although federal loans sometimes have slightly higher interest rates than private loans, their repayment terms are more generous. This is because they offer income-based repayment plans and protections like student loan cancellation, deferment, and forbearance.

The interest rate for federal undergraduate loans is 4.99% for the 2022-23 school year.

Thompson noted that federal student loans have a “light at the end of the tunnel” because any remaining balance on a loan for undergraduate education is forgiven after 20 years. The Civil Service Loan Forgiveness Program can also erase student debt down the road for some people working for eligible employers.

What role can parents play?

Parents can help fund their children’s college education by applying for a PLUS parent loan, which requires a credit check, according to CPA and tax strategist Paul Sundin.

Two parents can both apply for a PLUS parent loan, but the total amount received cannot exceed the annual limit. The annual limit can be calculated by subtracting the amount of assistance received from the total cost of attendance.

The Parent PLUS loan interest rate is 7.54% in 2022-23.

The repayment period for a Direct PLUS loan begins immediately after the parent receives the final loan payment, according to Parents can defer payments while their child is enrolled at least half-time, and for an additional six months after their child graduates or falls below half-time enrollment.

For students unsure of their post-university career path, what is a reasonable budget?

Thompson cautioned students against thinking that a particular college major offers greater license to borrow more funds. “Undergraduate degrees are highly transferable,” she said, reiterating that no matter what students intend to study, they should only borrow to cover the cost of their needs.

Above all, Thompson urged students who take out loans to complete the degree programs they start.

“So much outcome vulnerability in reference to indebtedness is associated with students not being able to earn that degree,” she said. “They are not able to get them back into the labor market,” which prevents them from repaying even smaller debts.

Without any guarantees in the future, Stuart Siegel, founder of Financial Aid Now, said students should not take out loans expecting forgiveness later. While one can estimate how much their earning potential will be after graduation, it’s best to err on the side of caution, he recommended.

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