Borrowing Wisely

Borrow money only if you have to. Every dollar you borrow now will be owed later with interest.


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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 - borrowing $2,500 a semester during four years of college results in a payment of $250 per month or more for 10 years. $5,000 per semester could result in a monthly payment of $500 or more - 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. As a reminder, subsidized loans are loans for which the government pays the interest on the loan while you are in school, potentially saving you thousands of dollars. If available, these loans should be your family's first choice.

With unsubsidized loans, the interest accrues on the loan amount from day one, thus increasing the size of the loan. This process is called "capitalization". Therefore, 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 to ask 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.

Based on surveys of tens of thousands of students from all over the country*, we've found that most students expect to graduate with little, if any, credit card debt. But in reality, the average student earning a four-year degree graduates with thousands of dollars in credit card debt. The amounts are even higher for graduate students. If a student does not understand how unexpected debt can happen to them, it's way too easy to fall into the minimum payment trap and end college with an unexpected high-interest credit card payment in addition to a student loan payment.

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 we said earlier. If you are unsure about what kind of goals may be appropriate for your family, talk with a financial aid administrator or financial advisor.

* Decision Partners Financial Literacy 101 Pre-Course Survey Results

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