1) Always Borrow From the Federal Government First
There are three different types of Federal Student Loans available which include the Federal Direct Loans, Federal Perkins Loans and the Federal PLUS Loans. They differ based on qualification and need, but they should always be the first choice of lender.
Federal loans offer lower fixed rates. Recently as low as 3 to 4%. In comparison, private student loans can charge interest rates of 15% and even more. In addition, federal loans offer much more flexibility than privately issued loans.
For example, based on your income you could differentiate your monthly payment. In some cases, you can even defer payment if you are in a dire financial situation. Lastly, if you decide to work in public service or select non-profit organization, there are additional options available such as loan forgiveness.
2) Avoid Private Loan
If the cost of your education exceeds what can be afforded with federal loans, it could be tempting to look at private loans. However, you should always aim to avoid funding your education with private loans.
Private loans are much less flexible and forgiving than Federal loans. For example, unlike federal loans, interest rate does not need to be fixed. Private loan lenders can offer variable interest rates which mean they can change with the market conditions. There is also no room to negotiate payment based on your income or financial situation. If you are having a hard time finding a job or are not making enough to cover your loan payment your options are very limited.
3) Evaluate Loan Consolidation Carefully
If you have multiple student loans, consolidation could be very tempting. Having one single payment versus many and in most cases, lower monthly bill. However, as anything that sounds too good to be true, there is always a catch.
Most often, the lower monthly payment occurs because the consolidation company is lengthening the term of the loan not lowering the total amount. And with a longer term, you would essentially be paying more over time.
Another effect of consolidation is that there is no going back. This could be especially detrimental if you happen to consolidate federal and private student loans. You would lose all the flexibility that federal loans provide such as payment deferral and restructuring in the event of financial hardship.
Evaluate loan consolidation carefully and make sure you understand all the impact this decision comes with.
4) Pay Them Off Quickly
There is no better way to gain control of your financial life and emotional peace than by eliminating debt. The mainstream teaches us that are are good debt and bad debt and student loans are good debt because they help us increase our income. However, as someone who worked through paying $105,000 of student loans I can tell you there is no such thing as good debt.
When you have debt, you spend not only your precious time servicing this debt, but also your emotional energy worrying and thinking about it constantly. If you have student debt, pay it off as quickly as possible. Simple. Then spend your mental and emotional energy on things that are really important to you; family, relationship, adding and creating value.
Do you have student loans? Or family member about to enter college? How are you thinking about student loans?