When it comes to student loans, parents and students both need to read the fine print carefully before signing on the dotted line.
We all know that ballooning student loan debt – over $1.3 trillion now outstanding – is overwhelming young adults, forcing them to delay buying a home and moving on with their adult lives.
Here’s one of the most important reasons:
One-in-five loan holders do not even know the terms of their student loans, according to new research by Annamaria Lusardi, a leading world expert on financial literacy at George Washington University in Washington.
They don’t know how their monthly payments are determined. More than half did not calculate what they might owe before taking out the loans, and almost half are afraid they can’t pay off the loan.
Tellingly, says Lusardi, “a whopping 53% of student-loan holders say they would do it differently” if they had a chance to do it all again.
Here’s four important tips to make sure your student loan bill doesn’t haunt you long after college:
1). Pick your college carefully with an eye toward affordability, and understand the difference between the sticker price and what you’ll really pay.
2). Calculate before taking out a loan how much your monthly payment will be after graduation, and most importantly, how long it will take you to pay the loans off. Use common sense; one rule of thumb is that your total loans should not exceed your first year expected salary. If you are going into a career with lower salary levels, don’t load up at the loan buffet.
3). Before you sign for a loan, make sure you know whether it is a government or private bank loan. The terms are very different. Understand whether the interest rate is fixed or variable. Keep a running total of your loans, so you know at all times what your balance really is. And when you graduate, choose your repayment plan well, and keep current on payments. Young grads can easily miss an email or two notifying them of payment deadlines and terms.
4). Minimize your need for loans by saving for college as soon as you can, choosing the right investments and savings plans, and using cheaper state universities and community colleges whenever possible. Living at home or going to school part-time while working can be good cost-saving options.