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Borrowing Wisely


Many students find it necessary to borrow money to help pay for college, but it's important to make smart borrowing decisions. In other words, borrow as little as possible without sacrificing the quality of the educational experience. Every dollar borrowed must be paid back later with interest - which will have a definite impact on life after college.

Think about it – assuming you use the Standard Repayment Plan and pay an interest rate of 6.9%, borrowing $2,500 a semester during four years of college results in a payment of over $250 per month for 10 years. $5,000 per semester could result in a payment of over $500 per month – and a possibly very different lifestyle as the result of student loan payments. Plus, the total amount of student debt and how well monthly payments are handled influences credit reports and credit scores – crucial factors that affect the ability to qualify for other loans in the future – from cars and homes to private graduate school loans.

That said, for most students, one of the realities of attending college is a student loan – or several student loans in fact. But the type of loans and how those loans are handled (even during college) is another part of a well-considered aid strategy.

Many students with federal loans receive a combination of subsidized and unsubsidized loans. Subsidized loans are loans in which the government covers the interest on the loan while the student is in school, potentially saving thousands of dollars. If available, these loans should generally be your family's first choice. With unsubsidized loans, the interest is added to the loan amount from day one, thus increasing the size of the loan. This process is called "capitalization". For example, if $1,000 is borrowed at an interest rate of 7% per year, at the end of year one the total amount owed is not $1,000, but $1,070, which continues to accrue interest on the new higher amount. So after four years, the original $1,000 loan would actually be a $1,310 loan. If possible, a great loan management strategy is to pay the interest on unsubsidized loans before it is capitalized. To use this strategy, you'll need to contact your lender to get more information on how to pay early and when interest is capitalized.

Finally, after you've selected the least expensive loans and borrowed only what's needed, the next step is to manage money responsibly while in school. Being responsible includes understanding the basics - needs vs. wants, budgeting, and credit management. It also includes understanding how expectations about debt may affect spending behavior while in school.

Part of borrowing wisely is to set financial goals in school and to track progress monthly. One important goal could be sticking to a sensible budget. Another goal could be to repay interest that accrues on non-subsidized loans prior to capitalization, as mentioned before. If you are unsure about what kind of goals may be appropriate for you, talk with a financial aid administrator or financial advisor.