Michael DiCillo, 28, knew something was amiss when he wasn’t able to register for his second semester of college in December 2006. At the time, he was a finance major at a private university in Cleveland, Ohio.
After a couple of phone calls, first to his father and later to his school’s financial aid office, reality finally sunk in — he was $18,000 behind in tuition payments.
“My dad was intent on having me stay close to home for school and he gave me his word that he was going to take care of [my tuition],” says DiCillo. But struggling with financial issues of his own, his father wasn’t able to come through as he had planned. So they followed the advice of the financial aid officer who answered DiCillo’s phone call — come into the office as soon as possible. They would help.
“Help” turned out to be quite costly. By the time he graduated college four years later, he was more than $100,000 in the red.
After defaulting on one of four private loans in 2011 and watching his credit score sink into the 500s, DiCillo buckled down. He signed up with ReadyForZero.com to help prioritize his debt payments, took jobs bar-tending and selling roofing to bring in extra income, and within three years managed to pay off $25,000.
“You can’t go back to the financial aid office. You can’t get mad at anybody other than yourself,” he says. “The most important thing is to be productive.”
Student loan debt has more than tripled over the last decade, with the average student racking up nearly $30,000 worth of debt for a four-year degree. At private colleges, where average one-year tuition stands at $30,094, it can be shockingly easy to rack up quadruple that amount.
“Few students (or parents) ever bother to ask how student debt will impact their lives after college,” says Joseph Orsolini, a financial aid expert with College Aid Planners. “They unfortunately realize the impact when it is too late.”
Student debt, which should be treated as a last resort, is far too often the first step low- and middle-income families take to finance college. But it doesn’t have to be.
Here are 5 things to consider before you take out student loans:
Calculate your return on investment. Choosing a major — and where you plan on studying it — should be just as much based on personal preference as cold hard math. If you see that the average starting salary for your chosen career path pays less than $40,000, it probably doesn’t make financial sense to enroll at a $35,000-a-year private university when you could accomplish the same goal at a public school where tuition is $9,000. Check out salary data sites like PayScale, which publishes an annual list of the average return on investment of college depending on where you go and what you study.
“Students and parents need to know if the amount of money they are spending or borrowing is going to pay dividends in the future,” says John McDonough, a financial advisor with Studemont Group. “Surprisingly, this concept is not intuitive.”
Don’t assume you won’t qualify for financial aid. Middle-income families often get the short shrift when it comes to financial aid — not quite poor enough to qualify for full aid and not quite wealthy enough to afford tuition at the sticker price. But the Free Application for Federal Student Aid is not the end all be all of college funding. “The student needs to commit to searching and applying for as many private scholarships [and grants] as possible,” McDonough says. “We constantly see and help families with incomes in the $200,000 range find money for their children's college.”
Start by asking your high school guidance counselor for a list of local scholarships, or try a simple search at TheCollegeBoard.com. Once you’ve chosen a list of schools to apply to, call their financial aid office to find out about their grant and scholarship offerings. The bottom line: student loans should be the last thing on your mind at this point.
Steer clear of private student loans. DiCillo was astounded at how simple it was to qualify for private loans. “It was like swiping your credit card at the gas station,” he says.
There’s a reason financial aid offices and lenders make it so easy — private loans are insanely profitable products for them to sell. You can read all about the pitfalls of private loans here. Here’s why they’re dangerous in a nutshell: they often have inflexible repayment options, which means if you graduate and can’t get a job, they likely won’t lower your payments; and their interest rates are often variable, meaning they might start off low one year and skyrocket the next.
Make sure you’ve maxed out your federal student loans before you consider venturing into private funding.
Pick schools that want you. Are you a musical prodigy, speak a dozen languages or have a passion for science or the arts? Run a web search for schools that are likely looking for your kind of talent — and might be willing to pay for it. McDonough says families have a better shot at scoring additional financial aid from colleges that are as interested in the student as the student is in the school. “A lot of institutions are looking for different profiles of students from different walks of life and might be willing to discount the cost of attendance,” he says. “After locating such a school, the families need to seek as much federal and state grants that might be available at the schools they have identified.”
Negotiate financial aid before you enroll. Financial aid officers can be a valuable resource in helping unlock sources of aid packages (“free money”) available to students in need. These packages can be negotiated sometimes, but if you’ve already enrolled, they may have less incentive to sweeten their offerings. “After enrollment financial aid offices lose motivation to help families minimize costs,” McDonough says. “This ‘negotiation’ needs to happen before the student accepts and the school knows the student has other school choices on the line.” Note: negotiating, while possible, isn’t always easy at public schools, which have a finite budget dictated by the state.
Bottom line: treat student loans as a last resort. Student loans should never be a default option. Before taking the plunge, Orsolini suggests answering these questions first: Have you applied for every scholarship and grant possible? Have you maxed out your federal aid? Have you considered moving home to save on housing costs? Have you gotten a part-time job to help pay some of your tuition? Have you considered a less expensive school? If you can answer yes and still find yourself falling short on funding, then certainly entertain the student loan option.
We asked Orsolini to come up with a list of questions every family should ask when researching student loans:
- How will the payment fit into a budget when I graduate?
- I may be able to handle the loan payment for this year, but what about next year?
- When will my payments begin?
- Is the interest rate fixed or variable?
- If I need a co-signer, can they get off the loan at some point?
- Have I missed the financial aid cycle for the upcoming year and will I be in a better position for aid next year?
- Does the college offer a payment plan instead?
If he had a do-over, DiCillo knows exactly how he would approach college differently:
“I would go to a local school, a state school or a community college for two years and once I knew what I wanted to do, I would [transfer],” he says. “If you don’t know what you’re doing, I think that’s how you get hurt. I didn’t have a plan.”
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