Strategies for Student Loan Debt

For college kids and kids entering college — and their parents — navigating the minefield of financial aid is a huge challenge. As the number of outright aid grants falls, student loans play an ever-larger role in putting kids through college.

These loans come in many varieties. Some have very attractive provisions and guarantees, but others can spell trouble for even the most responsible young adults.

The cream of the crop
The federal government provides the best student loans. The most common form of federal loan is the Stafford loan, which supplies money either directly from the federal government, or through a private lender.

The primary benefit of Stafford loans is that their costs and interest rates are regulated by law. That means that the fees you’ll pay when you first get a loan — including origination and default fees — can’t be more than a certain amount, recently around 2.5%. New loans also carry fixed interest rates that are usually pretty attractive.

In addition, some Stafford loans are subsidized by the government, meaning that the government pays the interest while the student is in school. In contrast, on an unsubsidized loan, interest accumulates while the student is enrolled, resulting in higher payments once loan repayment begins.

Another federal loan is called the Perkins loan. Reserved for students who have the greatest need, Perkins loans have no origination fee and an even lower fixed interest rate.

Many parents are also eligible for federal loans for their kids’ education. Known as PLUS loans, these generally have somewhat higher rates and fees than Stafford and Perkins loans.

The bottom of the barrel
At the other end of the spectrum are so-called private student loans. Students can get these loans from a variety of private lenders. Large banks usually offer them, and there are also specialty lenders that focus on student loans.

Unlike federal loans, terms on private loans vary widely. Some lenders offer rates below their prime lending rates; others have rates that go into the high teens. Origination fees also come in a wide range, with some lenders charging as much as 12% just to take out a loan.

Your best strategy
It’s important to get the best loan deal you can. With college costs rising far faster than inflation, students can take on tens or even hundreds of thousands of dollars in debt while they earn their degrees.

And it’s difficult to fix the credit problems that can result from taking on too much debt. Because of changes to bankruptcy laws, it can be incredibly difficult to get rid of student loan debt — even when you have a good reason. The consequence of these changes is that students and parents must be just as careful when considering student loans as they would be with credit cards or any other type of debt.

It’s most important to understand which kind of loan you have — the same lenders offer several types of loans, so it’s easy to get confused. Federal loans tend to offer better terms than private loans.

In addition, thinking about college as an investment may make it easier to weigh the costs involved with education. A college education increases earning power, but a more expensive, big-name school may not enhance a student’s prospects enough to justify the pressure of higher debt. A less expensive school may supply the flexibility to pursue the same wide variety of career options, and perhaps the same opportunities, after graduation.

Whatever you decide, student loans can be a valuable tool to get your degree. If you avoid the pitfalls along the way, a student loan may be the right decision on your path to success.