Reining in Student Loan Debt Through Wise Borrowing Practices

As student loan defaults climb to historic highs, and people around the country continue to struggle with outstanding debts related to their education, it is imperative that prospective enrollees know what they are getting into. Experts in the industry provide a significant level of insight into the many problems that arise concerning the aforementioned debt that people acquire when looking to further their education.

We sat down with one of these experts to try and figure out some solutions to these problems.

Expert Answers to Questions About Student Loans

Joseph Orsolini is an expert in college planning, using his extensive knowledge as a CFP to help families prepare to send their children to higher education institutions. We tapped into this expertise, which has been featured in The Wall Street Journal, Forbes and numerous other publications, to provide insight to prospective students.

Q: What can prospective students do to ensure that they take on a manageable loan burden even before entering college?

A: I think the key is not going beyond the federal student loan limit. The federal government allows you to borrow $27,000 over the course of four years of college. If you go beyond that, you generally have to get private loans, which have variable rates, require co-signers, and that’s really when people start to have problems.

The other important piece is understanding what your income level is going to be once you graduate. If you’re going to be in a low-paying field, don’t take out as much debt as you would if you were to be a doctor or an engineer. Make sure that your debt service will fit your budget once you graduate.

Q: What should consumers know about the difference between student loans issued by the federal government and those from private lenders?

A: Every student who fills out the Free Application for Federal Student Aid (FAFSA) automatically qualifies for a federal student loan, or a Stafford loan as it is known. It’s a loan where you don’t have to make payments while you’re in school, you’ll typically make your payments over a 10-year period, you don’t need a co-signer on them, and rates are usually pretty favorable. Also, there is a number of repayment options once you graduate, including an income-based repayment plan, and there are some loan forgiveness programs.

If you go beyond those loans, you’re looking at private lenders, like Citibank, Sallie Mae, Discover, etc, and on those loans you will generally need a co-signer – usually a parent or another family member. Most typically, those loans will have variable rates, so you may get a great rate today, but as rates climb up over time, those loans are going to move with you. You also don’t have loan forgiveness programs and fewer repayment options. So always make sure you take all the federal loans before you even begin to think of going to private lenders.

Q: How does a sizable student loan balance affect a young person after he or she graduates – both in the short and the long term?

A: Depending on the amount of debt that you have, it’s going to definitely impact your lifestyle – whether you can move out of your parents’ house or buy a car – it may even impact your dating – whether you have enough money to go out and buy pizza or dinner. And we’re really starting to see that over the last 4-5 years, things like not being able to get married or have kids.

Q: If a graduate is swimming in debt, what are the initial steps to take?

A: Talk to the lenders about the different repayment options. While not ideal (because it will cost you more in the long term), you can get a lower monthly payment and string it over a longer period of time; you can also do income-based repayment on your federal loans – the key is to get this payment as low as possible if you find yourself under water because you don’t want to start missing student loan payments. The reason for that is that if you go through college, you probably have four to eight different student loans, because each loan you get counts separately. So if you miss just one payment, it’s going to show up as a hit against all of these loans and can really impact your credit.

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