Lowdown on loans: loans can be a practical, low-cost way to pay for college—just be prepared to make payments far into the future - Paying For College

Careers and Colleges, Nov-Dec, 2003 by Don Rauf

Waiting tables and working summers for a surveying firm gave David Hilmer a nice nest egg for college at the University of Wisconsin, Madison. Although the money he saved was a good start, it was not enough. "After about a year and a half, I was scrambling--thinking how I was going to cover my dorm expenses and tuition," he recalls. Now 37 and the director of business development at Little Tornadoes, an Internet consulting firm in New York City, Hilmer says that student loans (a federal Perkins, Stafford, and a university loan) enabled him to graduate.

Will the high cost of a college education today, it is no wonder many students rely on loans to help them make ends meet. Planning ahead now and understanding your options when it comes time to repay loans can help you make smart decisions about borrowing. Here are some simple guidelines that apply to the major federal Joan programs--the Perkins, the Stafford, the PLUS--as well as independent bank loans. (For more specifics on programs, see page 18.)

SET A LIMIT

Keep in mind that every dollar you borrow must be repaid, with interest, which can really add up over a 10-year (or longer) repayment term.

"It's easy to think a $200-a-month payment is not a big deal," says Hilmer, "but those payments can take a big chunk out of your monthly income, and you're going to need to pay your bills."

To get some idea of how much is too much, you need to estimate how much you'll be able to pay back once you graduate. That involves estimating your future salary and expenses.

The best way to do this is to use a budgeting calculator available on the Web site of a major lender such as Nelnet (www.nelnet.net) or Chela Financial (www.loans4students.org). Calculators let you estimate monthly expenses--rent, utilities, food, clothes, car payments, and auto and apartment insurance. Then you compare those expenses to your estimated salary. Some calculators provide salary info or you can view salary averages online at Bureau of Labor Statistics Web site at www.bls.gov/oco/home.htm. By subtracting your estimated expenses from your estimated salary, you can predict how much you can afford in monthly loan payments.

AVOID DEFAULT AT ALL COSTS

If you do wind up borrowing more than you can afford, you run the risk of defaulting, or failing to pay back your loan according to agreed-upon terms. These terms are specified in a promissory note, a legal document that binds you to make regular payments.

Default usually results after you miss payments for 180 days. Many defaulted loans are sent to collection agencies that may charge costly late fees and take money from your wages. Worst of all, a defaulted loan can haunt you later because it will be recorded as part of your credit history for seven years. Lenders refer to your credit history when you apply for any major loan. If they see you have a defaulted loan, they may deny you a mortgage, car loan, credit card, or personal loan, or charge a higher interest rate. "It takes a long time to cure a credit problem," says Doug Dolton, Chief Operating Officer at Chela Financial.

Most lenders provide students with charts to help track repayments---or you can use our handy "15-Minute Loan Manager" on the previous page. Keep in mind: If you can't make a monthly installment, immediately contact your lender or servicer (the company that owns your loan) to discuss the problem. Plus, paying on time has further advantages--lenders like Chela and Nelnet will give about a 1 percent discount to students who make consecutive regular payments.

UNDERSTANDING THE TERMS

Knowing the terms of your loan--the conditions by which you have borrowed and are obligated to repay the money--can help you avoid default. But first you should start by understanding some basic loan terms:

Grace period. A period of time---usually lasting six months after you leave college--when many student loans don't require repayment. After the grace period, a deferment or forbearance can temporarily suspend repayment.

Deferment. A period when a borrower who meets certain criteria may temporarily stop loan payments. Depending on your type of loan, the federal government may pay the interest on it during your deferment period. New borrowers might be eligible for a deferment if they are still enrolled in school half-time or full-time; unemployed; studying in an approved graduate fellowship or rehabilitation program for the disabled; or experiencing economic hardship.

Forbearance. The temporary adjustment to your loan repayment schedule in cases of financial hardship. Anyone with student loans may be in forbearance for six months at a time, for up to a total of three years, but interest still accrues.

Loan consolidation. Combining several loans into one bigger loan from a single lender, which is then used co pay off the balances on the other loans. Loan consolidation can lower the monthly payments and extend the repayment period to a max of 30 years, but you'll pay more interest.

"Loan consolidation can be a good option now because it locks in interest rates, which are currently very low," says Don Bouc, president of Nelnet. Making one loan payment a month can also simplify your life, adds Dolton of Chela.