Manage Money Like a Pro – Student Loans Edition

By on Aug 26, 2013 | Getting Out of Debt | 5 comments

Manage Money Like a Pro – Student Loans Edition

Student loans are one of the most common types of debt, along with credit cards, auto loans and mortgages. It is likely that you or somebody you know has student loan debt. Many recent college graduates struggle for years to pay it off. Yet with the costs of college steadily rising, it is becoming more and more difficult to pay for school without student loans.

As part of our ongoing Manage Money Like a Pro series, I recently discussed student loans with Robert Farrington, founder of a popular website The College Investor, and an expert on many student loan issues.

Meet Robert

Student Loans Expert - Robert FarringtonRobert Farrington is the founder of The College Investor, a personal finance and investing website dedicated to helping young adults avoid student loan debt and get started investing in their future. Among other articles, Robert has showcased his battle with his student loan provider. It has given his readers a lot of insight into the student loan market and led him to write his first eBook – Student Loan Debt: Getting in Smart, Getting out Painlessly.

Robert has recently put together 101 Essential Tips and Resources for College Students to help freshmen get off to a great start in their first year of college.

Using Student Loans to Pay for College

We started our interview by talking about using student loans for what they were meant for – paying for college education:

I have heard so much criticism and so many horror stories surrounding student loans. But how can I pay for college without them? What options do I have?

Student loans are scary in one aspect – the collateral of the student loan is you. Unlike a car loan, where if you don’t pay they repossess your car, if you don’t pay your student loans, the government will garnish your wages, take your tax return money, or even take away your social security. With that in mind, student loans themselves aren’t horrible – you just have to be responsible in the amount you borrow and take into consideration your future earnings.

If you want to be an artist, college may not be ideal for you, especially if you have to take out student loans. However, if you’re going to be a computer scientist and expect a high salary after graduation, a reasonable amount of student loan debt isn’t necessarily a bad thing.

At the end of the day, I’m a believer that you should avoid student loans as much as possible. This means applying for financial aid, getting grants, and working through school. When thinking about financial aid, take a look at our financial aid pyramid that ranks the different types of aid from best to worse.

If I am going to take out a student loan to finance at least part of my education, what should I look for? Where can I find the best student loans?

If you’re going to take out student loans, you need to do a Return on Investment (ROI) calculation for your education. Look at websites like Salary.com or browse the jobs posted by companies you may want to work for to get an idea for a salary range of your profession. Once you get a good understanding of how much you’ll make after you graduate, you can look at the cost of your education and figure out how much debt you can afford.

I’m a believer that your monthly student loan payments should not exceed 10% of your monthly salary – and that’s pushing it. Take a look at your expenses, see how much debt you can afford, and see if that will work, or if there is still a gap. You may find that you can fill that gap by working or getting a grant.

As for the best student loans, you need to stick to Federal student loans – avoid private ones! The only exception is medical school, but there are special loan programs available to medical students.

Paying Off Student Loans

I have 2 years left in college and am already $50,000 in student loan debt. Should I use some of my part-time job’s income to begin paying it off? I am afraid of how much debt I will have once I graduate.

Yes! There is no harm in paying off your debt early. But a better question is – why not use your earnings to avoid taking out more debt, since you are not required to pay on the existing loans until you graduate?

I would take your part-time income and maybe side hustle income and use it to pay as much of your remaining tuition as possible to avoid more loans – then make a plan to pay off the existing debt upon graduation.

I am finally done with school, got my first real job and am ready to begin improving my financial situation. At which point should I focus on paying off my student loans? Should I try to pay them off sooner?

I would focus on getting out of student loan debt as fast a possible. You have a 6 month grace period after graduation before you’re required to start making payments. At that point, I’d put everything I had at paying off my loans.

Something to remember is that you can’t ever get rid of student loan debt via bankruptcy. So, if you can’t afford your loans, they’ll garnish your wages. Make it a point to get rid of your student loan debt first.

Student Loan Deferment & Forgiveness

I have a lot of student loan debt, but money is really tight right now. I’ve heard that you can get some (or all) of your student loans differed or even forgiven. How do these two programs work? How can I apply?

Yes, there are options out there to get your student loans forgiven or deferred. Remember, getting your loans forgiven makes them disappear, but getting them deferred only delays the inevitable. So if you just need a short delay, look at deferment, but the ideal is getting them forgiven.

Check out these lists of student loan forgiveness and deferment programs and see if you qualify:

Think About What’s Best for You

You’ve had some pretty bad experience with student loans. If you had to single out just one lesson you’ve learned, what would it be?

The biggest lesson I’ve learned about student loan debt is to make sure you only take out what you can afford. If you can afford your loan payments, you’ll be fine. But if you can’t – you’re screwed. It is also important to keep in mind that your school’s financial aid office isn’t there to help you – it’s there to help your university get paid. Think of them as a used car lot – they will figure out a way to get you into school, but they’re not thinking about your future financial situation.

I would like to thank Robert for taking the time to answer my questions and share his insight into many issues surrounding student loans. If you have more questions after reading the interview, leave a comment below, or visit Robert’s website – The College Investor.

What’s your experience with student loans? Do you have any tips that may help others choose the best loans or speed up the repayment process?

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5 Comments on “Manage Money Like a Pro – Student Loans Edition”

  1. Daisy @ Prairie Eco Thrifter

    I’m lucky in that I worked throughout school, so I could pay for it up front. I do have a small loan from my first couple of irresponsible years in school but it’s completely manageable and practically interest-free. So many people get sucked into the student loan trap, though.

    • Anton Ivanov

      They do, and often without realizing just how long it’s going to take them to pay off all of their student loans once they graduate.

    • James Molet (SavvyJames)

      Yep, my wife paid as she went and that proved to be the best way to go. Money was tight at times, but no mountain of debt to deal with at the end. No doubt that it is easy to get sucked into that student loan trap…or just the trap of debt – particularly credit cards – period.

  2. James Molet (SavvyJames)

    As a veteran, I always suggest people consider military service as a means of paying for college or paying back existing loans – the services have programs for both. Additionally, the services (it varies between them) also offer Tuition Assistance (TA) while on active duty. Not incurring a ton of debt via student loans is financially savvy and helps individuals achieve financial freedom. Perhaps you will consider doing a piece that addresses how the military service can be part of the solution for getting an education.

    • Anton Ivanov

      James, that’s an excellent point. Military members can use the TA program while on active duty and the GI Bill program after separating to pay for their education.

      I’ve written previously about both – Applying for Military Tuition Assistance and Comparing GI Bills.

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