Managing your money wisely is a key to an affordable education and less debt after you graduate. Here are some strategies you can use to avoid borrowing money for college or to reduce the amount you need to borrow.
- File your FAFSA. You may be able to take advantage of need-based grants and other gifts, which will reduce or eliminate your need to take out student loans.
- Look for scholarships. Make your search wide—don’t forget to look for scholarships in your hometown. Are there any civic or service organizations, private foundations, or churches that offer scholarships you may qualify for? Are you eligible for a military scholarship? Also, scholarships aren't only for freshmen, so set aside time to browse and apply for them throughout your college career.
- Borrow federal loans. Federal loans tend to have lower interest rates and better payment plans than private loans, and you don’t have to start paying them back until after you graduate. Stick with subsidized loans if you can; unsubsidized loans start accruing interest right away.
Unlike a subsidized loan, the government begins charging interest on a federal direct unsubsidized loan as soon as the money is paid to you. You can start paying interest while you’re in school, or you can capitalize it (add it to the principal amount).
Capitalizing interest lets you defer interest payments while you’re in school. That means the interest gets added to your principal—so the next time interest is calculated, you’ll be paying interest on that interest.
For example: Ray is a freshman and needs to take out an unsubsidized loan, but he’s not sure how much deferring interest payments for four years will cost him. Here’s how he worked out the numbers:
Interest paid Interest deferred Loan amount $5,500 $5,500 Interest charged (first 48 months) $944 $1,024 Interest paid (first 48 months) $944 $0 Principal to be repaid after 48 months $5,500 $6,524 Interest paid during loan repayment $1,274 $1,510 Total repayment cost $6,774 $8,034 Monthly payment $57 $67 Years to pay off 10 10
By paying interest while he was still in school, Ray saved $316 in interest charges.
- Don’t borrow more than you need. If you absolutely must borrow money, don’t borrow more than you need for any given academic period. The more you borrow, the more you have to pay back—and the more interest you’ll pay. Even if you’re offered a large loan, you don’t have to accept the full amount. See how much you could save if you reduce the amount you borrow.
- Track how much you've borrowed. Make sure that amount stays in your comfort zone. Aim to borrow no more than your anticipated first year salary.
- Attend all your classes. Missing a class is like throwing away cash—you’re paying for each credit hour, so be sure you get your money’s worth.
- Graduate on time. With IU’s banded tuition rate, you can take up to 18 credit hours for the same price as 12. Two extra classes a semester can really make a difference if you want to graduate in four years (or less). Adding extra semesters will increase the overall amount you end up paying.
- Repay your loans quickly. It goes without saying that the faster you repay your loans after you graduate, the less interest they’ll accrue. And there’s no penalty for paying most educational loans early, including federal direct loans.