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Anya Kamenetz Generation Debt

Anya Kamenetz, Generation Debt

Eight Last-Minute Student Loan Shopping Tips

by Anya Kamenetz

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Posted on Tuesday, August 14, 2007, 12:00AM

The fall semester is just around the corner, but some people are still shopping for student loans. One private lender I interviewed told me that up to 80 percent of his loans were made in August.

With all the scrutiny on lenders' relationships with college financial aid officers, the silver lining is that more students are now aware that they have options beyond their colleges' "preferred lender" lists.

With that in mind, here are eight tips for better borrowing, whether you're a freshman, graduate student, or somewhere in between:

1. Cut costs.

Before you take out a private loan, look at the big picture. Do you have any savings you can direct toward education costs? Can you live at home for a year, or live off-campus instead of in a dorm? And you're getting a job, right? (Experts recommend that full-time students work no more than 15 hours a week, though.)

An acquaintance of mine who's heading off to graduate school in Los Angeles this fall recently wrote me for advice. She said, "I really wanted to take out at least a small loan because the cost of books will be close to $2,000 a year in addition to car insurance and sky-high gas prices. I suppose I'll need food and shelter, too. Really, I just needed the tiniest bit of breathing room."

I wrote her back, "The thing to keep in mind when taking out private loans for school is this: It's like putting your expenses on credit cards (8 percent interest rate and up), EXCEPT, when worse comes to worst, there's no bankruptcy protection for private loans. The other thing is that these loans create a false sense of security. You can take out $10,000 a year and feel like it's justified. So if I were you (easy enough to say), I would take a second job, borrow money from your parents -- anything to avoid running up that private education loan debt."

She wrote me back to say she's heading off to school debt-free: "I will definitely not be taking private loans. I just spoke with a former professor of mine and he said the same thing [you did]. I'll be able to make it work; I'm not the first or the last to go through this." Wise words.

2. Are you borrowing enough?

This may sound counterintuitive, but it's cheaper to cover education costs through work, family contributions, loans, and grants than through credit cards, as 24 percent of students do.

Your budget should cover books -- an average of over $900 a year -- and living expenses, which were estimated at $3,500 a year by the excellent web site FinancialAidLetter.com. This site decodes actual aid letters from colleges and can be tremendously helpful in dealing with your own financial aid office.

3. FAFSA now!

If you haven't turned in your Free Application for Federal Student Aid (FAFSA) form for this school year, the good news is that it's not too late. You can get Pell Grants or federal loans year-round, as long as you send in that FAFSA. Apply online.

Financial aid officers I've interviewed say that August is their busiest month, but they'll often help you out by giving an extension if your loan money is still on its way at the beginning of the semester.

4. Max out federal loans.

Once you've received your FAFSA results, make sure you're borrowing federal loans to the limit before you take a dime in higher-cost private loans. The new annual federal student loan limits, subsidized plus unsubsidized, are $3,500 for freshmen, $4,500 for sophomores, $5,500 for upperclassmen, and $20,500 for graduate students. Independent undergraduates can borrow more.

Also consider the PLUS and GradPLUS loans, which go up to the full cost of attendance. PLUS loans for undergraduates are taken out in the parents' name, but wary moms and dads should consider that private loans often require a cosigner as well.

5. Shop online.

Looking beyond your school's preferred lender list can bring a much better deal. Remember, despite what your college financial aid office might tell you, you have the legal right to get your loans from anywhere, even if it takes a few days longer for approval.

Using the new web site SimpleTuition, I found subsidized federal loans with APRs as low as 3.65 percent, and private loans as low as 7.26 percent. But don't stop there -- SimpleTuition only lists a fraction of the thousands of lenders out there. Bankrate.com also compares interest rates for private student loans from many different lenders, and FinAid lists about 300 lenders along with contact information.

6. Be a smart shopper.

Private lenders offer a dazzling range of incentives and discounts, but be careful. In general, upfront fee waivers and interest rate reductions are far more valuable than incentives that kick in only after repayment begins or after 48 payments.

For example, the nonprofit Project on Student Debt reports a 1 percent lower interest rate is worth exactly one percentage point upfront, whereas the same reduction after 48 payments is worth only 0.33 percent -- and if you make a late payment sometime in those first four years of repayment, as most people do, you give up the benefit altogether.

7. Ask the right questions.

For instance, use the Project on Student Debt's list of questions to ask before taking out a private loan. In general, you're looking for the lowest fixed interest rate with the least strings attached.

More than just the amount and interest rate, you need to know all about repayment options before you sign on the dotted line. Can you begin paying back right away with a payment plan? Sending even $50 a month from your part-time job can seriously bite into interest charges in the future.

Conversely, how long can you defer repayment in the future in case you go back to school or have "economic hardship"? What will your interest charges be in such a case? Grab a calculator -- or go online -- and do the math.

8. Plan for the future.

Education debt isn't a quick fix to get you through the next three months, but part of a lifetime plan. Consider shortening your overall time in school, and thus your debt, by taking summer school, doubling up on credits, or taking some credits at a less costly university (maybe overseas!).

If graduate school is in your plans, you and/or your parents can start a tax-free 529 education savings plan now to help deal with the coming costs.

In a future column, I'll cover more ways to lower overall education costs -- and how to decide if college is worth it in the first place.

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36 Comments

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  • vlad - Thursday, August 16, 2007, 5:42PM ET  Report Abuse

    • Overall: 3/5

    This one not that bad actually - some plain pointers for someone like me with a college-age son. If AK can keep staying away from those ridiculous generalizations about the plight of those unfortunate to be young right now... - the column will become much better. More like this, please!

  • Chris - Thursday, August 16, 2007, 2:12PM ET  Report Abuse

    • Overall: 5/5

    The poster from Michigan, where state schools cost tens of thousands per year, should be grateful that that money funds an excellent football team. Ha ha, just kidding, sorry. I graduated from Arkansas State where tuition and fees add up to less to $2,000 per semester. As you might predict, I worked through college and my net worth was actually higher after 4 years! Much of the tuition inflation we are seeing happens at the schools where they have 20 applicants for each opening. Those who want to remain debt free have plenty of options at the schools without high-end sports teams, fancy architecture, brand recognition, or other distractions. Your choice of major and actually learning something are the important things.

  • Yahoo! Finance User - Thursday, August 16, 2007, 12:04AM ET  Report Abuse

    • Overall: 2/5

    To echo the other poster, there's nothing wrong with a dose of common sense in these articles. Anya also reminds me of one of the actresses on Melrose Place who had common sense. Does anyone remember who that was?

  • J_E_S - Wednesday, August 15, 2007, 9:15PM ET  Report Abuse

    • Overall: 3/5

    Much of this is common sense, but worth repeating. I always add a dash of common sense into my economics lectures.

  • Yahoo! Finance User - Wednesday, August 15, 2007, 8:34PM ET  Report Abuse

    • Overall: 4/5

    Good info for someone considering a student loan. Also, to the commenter who says that this doesn't belong on here because supposedly this is an "investing" forum, I guess you missed the fact that this is called YAHOO! FINANCE, and NOT Yahoo! Investing....

  • BB - Wednesday, August 15, 2007, 5:35PM ET  Report Abuse

    • Overall: 3/5

    This article was good overall and helpful to me since my wife is going back to school to become a teacher and most federal loan programs won't help with the cost. We're going to do our best no to take out any loans if we don't have to. I have to disagree on the people who say state schools cost as much as private universities. A private university would have cost me (yes me since my parents were retired and not able to help me much) $27,000 a year in tuition alone! A state university in CA, Silicon Valley no less, cost less than $1000 per semester for tuition ($2,000 per year). I was able to survive/live on approximately $15,000 per year ($10,000 per year in income and $5,000 in pell grants FAFSA is IMPORTANT) in San Jose, CA during the dot com boom while I was in college. It can be done on the cheap, by living off but nearby campus, having a job (I worked approximately 25-30 hours per week, which is more than recommended but you can sleep after you graduate!), not having a car (this is a biggie since most public universities subsidize transit use for their students, i.e. you pay $30 per semester and can ride the local transit system for free and hey you'll help the environment too), don't live on campus (those dorm 'packages' are a rip off & that dorm experience isn't all it is cracked up to be), go to summer school (you can get grants for this too & you'll finish sooner), get grants and scholarships (there are literally 1000s of them out there & just a couple can help you at least be comfortable), and get an internship in the field you hope to go into after graduation (most of them pay now-a-days and they can be a foot in the door when it comes to the job hunt at/after graduation). I almost forgot don't run up credit card debt...I didn't have much except when I really needed groceries or interview clothes & didn't get paid until the next month. This is all simple advice but by following it, it helped me be able to buy a home in California by myself (no help from the parents) when I was 27 years old (five years ago) and using a sensible fixed rate home loan, as well as having a decent reliable car too, though I still ride my bicycle and transit more than I drive, and I'm able to travel some too.

  • Jeff - Wednesday, August 15, 2007, 4:05PM ET  Report Abuse

    • Overall: 3/5

    good basic info. links to deeper info would be helpful

  • Mark F - Wednesday, August 15, 2007, 4:02PM ET  Report Abuse

    • Overall: 1/5

    It's not Anna's (or Penelope's) fault. Yahoo needs different forums for education and career interests. Putting all these non-investing articles in an investing forum invites disappointment. It's Yahoo that sucks.

  • "Mad" Mike Fisk - Wednesday, August 15, 2007, 3:42PM ET  Report Abuse

    • Overall: 4/5

    I don't know where commenters here are getting off thinking that public school will allow you to finish debt-free... public university in Michigan, tuition, fees, books, room and board... all that comes to a grand total of about $20,000 a year. I'm coming out of my "experience" about $35K in the hole, and figure I'm doing pretty good... and that's with working 20 hours a week while taking 16-20 credit semesters. Anyone who thinks that a part-time job and living spartan will allow them to finish college debt free anymore is either an old-timer, delusional, or did far better in getting scholarships than the rest of us did. For those of us who have to fight our way through loans, this is good advice.

  • Flarben - Wednesday, August 15, 2007, 3:02PM ET  Report Abuse

    • Overall: 4/5

    This column was well-researched. One thing she needs to mention is that the payoff vs. expense of a college degree is not what it used to be, since wages/salaries have been stagnant while college costs are sky high. Also, universities are handing out degrees like candy (look at all those BS "executive MBA programs" from even well-respected universities that are little more than social events). By the way, Yahoo readers, Ben Stein is getting his butt verbally kicked by Doug Kass over at RealMoney. Doug is a TRUE financial expert, unlike Ben. Apparently Ben is absolutely clueless, but y'all knew that. OK, back to your life.

  • Yahoo! Finance User - Wednesday, August 15, 2007, 2:33PM ET  Report Abuse

    • Overall: 4/5

    Once again, the poor ratings seem to come from those with a reading deficiency. After reading the article and the comments I note that all but one of the negative comments were addressed in the article. Also: the grammar, spelling and word choice of the negative comments seem to indicate a level of education not equal to that claimed. While not perfect, Anya’s comments were of value to most undergrad and graduate students who need financial assistance. She clearly indicated that loans were not a good idea if other sources of funding were available, that taking a job to minimize loans was an excellent idea and that only the necessary amounts should be borrowed. With two bachelor degrees and a masters attained on my own nickel while working more than full time (I generally held two or more jobs) I can tell you that it is hard. I can also tell you from experience that having an employment record that parallels your education is looked on very favorably by hiring managers. Grades are important, but not the only thing considered.

  • Yahoo! Finance User - Wednesday, August 15, 2007, 2:09PM ET  Report Abuse

    • Overall: 3/5

    This is good, but this could have been recharacterized as an article geared toward the parents of these students who are reading this site and not the high school seniors and college freshmen who aren't.

  • Yahoo! Finance User - Wednesday, August 15, 2007, 1:34PM ET  Report Abuse

    • Overall: 4/5

    I don't see how Ms. Anya's advice is flawed as previous comments have noted. Not everyone works and goes to school at the same time. And, anyone who can go to school full time and work enough to survive and pay 30k/year in tuition can't possibly have done as well in class as their fellow loan taking classmates. To this end, that first job following college is more likely to evaluate you based on grades rather than evaluating you based on work experience in unrelated fields. Work smarter not harder. Make an accurate budget. Take enough Stafford gov't loans up to the max to cover your expenses and take private loans to cover the difference if the difference is more than what you can make from a summer internship.

  • Adam - Wednesday, August 15, 2007, 1:21PM ET  Report Abuse

    • Overall: 1/5

    Ever heard of state school, saving and working your way through college? I graduated debt free and never took out a loan from anyone over 5 years of college. It is possible, but Anya would rather teach people how to take on debt or line up at the gov't money trough than give useful investing advise. The only reason I come to Yahoo Finance is thanks to being debt free and now having spare cash to invest in the markets. Put your generation Y garbage on "My Space."

  • jiminy29929292 - Wednesday, August 15, 2007, 12:35PM ET  Report Abuse

    • Overall: 4/5

    This isn't an advertisement, but www.abebooks.com has great deals on used textbooks...usually in the $5-10 range. It beats $170.

  • JimO - Wednesday, August 15, 2007, 12:21PM ET  Report Abuse

    • Overall: 3/5

    Fine, but what is a "private loan"?

  • sal - Wednesday, August 15, 2007, 12:20PM ET  Report Abuse

    • Overall: 1/5

    This article seems to be copied from a typical financial aid office pamphlet.

  • hellriser - Wednesday, August 15, 2007, 11:20AM ET  Report Abuse

    • Overall: 1/5

    UNREALISTIC.

  • MikeD - Wednesday, August 15, 2007, 11:10AM ET  Report Abuse

    • Overall: 3/5

    Pretty good info in here, if you are 17 and in high school. Past articles were fine for those trying to pay for school or those in or fresh out of the military. Anya, maybe you should cut at a bigger slice of your target readership than you have in your first articles. You are writing to pre-Gen Y people here!

  • StacyR - Wednesday, August 15, 2007, 11:06AM ET  Report Abuse

    • Overall: 2/5

    Her advice is unrealistic, I don't think you should get more money than you need. But don't "borrow" from your parents, if they have they money they's give it to you. What happens two years in when they have a medical emergency and need their money. Be realistic and borrow the minimum.

  • Daddytimes4 - Wednesday, August 15, 2007, 10:21AM ET  Report Abuse

    • Overall: 5/5

    Good basic information, needed by many people.

  • Brian - Wednesday, August 15, 2007, 9:53AM ET  Report Abuse

    • Overall: 4/5

    Decent, Thanks for reminding me how much I will need to spend on books this year :(

  • Steven - Wednesday, August 15, 2007, 9:34AM ET  Report Abuse

    • Overall: 4/5

    A good analysis for once. It would be nice to see an article where someone does a cost-benefit analysis of various degrees/majors. It doesn't make sense to go to a 40k/year school to major in a field that doesn't pay much. Also, while it may cost money to go to grad school in some fields, many technical (science/enginnering) fields pay tuition plus a stiepend for grad students working on research.

  • JC - Wednesday, August 15, 2007, 9:33AM ET  Report Abuse

    • Overall: 1/5

    Very poor as usual. Enough said.........

  • A Publius in training - Wednesday, August 15, 2007, 8:53AM ET  Report Abuse

    • Overall: 3/5

    Number one way to reduce college education costs? Realize that a very good 1st 2yrs of a degree can be had at a community college usually for far less than the cost of a 4yr university.

  • G - Wednesday, August 15, 2007, 8:51AM ET  Report Abuse

    • Overall: 5/5

    Another suggestion that falls under point #8: test out of as many classes as possible that are not in your major field. Many schools, for a small fee, offer exams for credit. CLEP exams are just $65. Buy the text, cram for a month, and save your tuition dollars.

  • Norcross - Wednesday, August 15, 2007, 8:25AM ET  Report Abuse

    • Overall: 4/5

    She's right on the money. My wife took her student loans for a private law school before we met, and they're now over $165,000 (just graduated). She just signed where the school told her to, and has some pretty crappy terms. Also, keeping in mind that the "consolidations" make all payments due right away, so always, ALWAYS, due the research before you get your "free" money.

  • European_pov - Wednesday, August 15, 2007, 6:30AM ET  Report Abuse

    • Overall: 4/5

    Nice paper. But saving before having to go to college is best. I completely agree with "Finance user" : "I am not looking forward to giving someone $1000 of my paycheck each month for the next 10 years." The day each of my nephews were born, I opend a saving a account at a local bank and saved 15 USD a month for each of them (that's 45 USD, not a big charge). The amount was increased for inflation each year (now 25 USD). Now the oldest one is turning 18 and the bank account holds around 5000 USD. I recently learned that parents and grand parents did the same on their side with equivalent amounts. So compare 15 USD saving with 1000 USD to repay debt. That will be a really nice christmas present isn'it?

  • Yahoo! Finance User - Wednesday, August 15, 2007, 5:22AM ET  Report Abuse

    • Overall: 1/5

    If you can avoid taking out a loan, do it. I can tell you that after two degrees and 70k in debt, I am not looking forward to giving someone $1000 of my paycheck each month for the next 10 years. To get a lower payment I have to stretch it out to a 30 year payback. Even less appealing. Think about how much fun the future is going to be before you take out a loan to sit around with your friends instead of get a part-time job. Capitalism has finally figured out how to legalize slavery.

  • Yahoo! Finance User - Wednesday, August 15, 2007, 3:39AM ET  Report Abuse

    • Overall: 5/5

    I agree with Mr. Main Event below. Would like to see a future article about financing a graduate school degree. I hear there's not a whole lot of federal aid available to those working towards a graduate degree.... Good info though.

Showing comments 6-35 of 36<< PreviousNext >>

More from Anya Kamenetz

Read the Generation Debt Book

According to economics professor Laurence J. Kotlikoff, Generation Debt offers "a truly gripping account of how young Americans are being ground down by low wages, high taxes, huge student loans, sky-high housing prices, not to mention the impending retirement of their baby boomer parents." Generation Debt will inspire you to take charge of your financial future.

Read more from Anya Kamenetz here and here.

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