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How to Handle Student Loans

 

First, if you're just considering getting a student loan at the beginning of a college career, what can you learn about student loans to help you offer advice to your kids as they get ready to head to college? Let's take a closer look.

Shop around for a loan

Don't take the first loan you're offered. Going to college deserves your full attention and if you have to fund it with loans, make sure you're getting the best rates. Federal loans are most widely accessible through colleges and universities.

Don't discount your local bank — if you have a good reputation with a local bank, you may be able to secure a lower interest rate than the federal government offers, but local banks probably won't be able to offer deferred interest, so you'll have to compare interest rates and weigh the pros and cons to find the best plan of action with your student. However, note that private loans are historically worse for students because many require immediate payment, have higher interest rates and offer less flexible repayment terms.

Pay attention to entrance counseling

At a minimum, loan entrance counseling will explain the benefits and consequences and what's expected during repayment. Don't complete entrance counseling until you understand everything about the loans. If a section of the counseling doesn't make sense, speak with the lender or put in a call to the school's financial aid office and ask for an explanation of the concept.

Take out as little as possible

Take out as much money as needed — but no more. Summer jobs and part-time work during the school year can pick up the slack. Put information in a loan calculator to find out how much money you will be paying in interest charges in the long run. That should inspire you to be as frugal as possible.

Research repayment options

Many careers offer loan repayment assistance, including teaching in underserved areas and joining the military. Find out whether repayment assistance will apply to private as well as federal loans. Sometimes, signing a two- or five-year contract will help in receiving the benefit.

Take responsibility

Student loans can help students follow their dreams, but be wise about how much is taken out. Now, suppose you're on the other side and you're dealing with an amount to pay back that seems overwhelming. It felt like free money when you were taking it out, and so you used the student loan to live way beyond your means.

The loan may be in deferment but still racking up interest. Remember to understand your loan — know the terms and details of your loan and whether it's eligible for an income-based repayment plan or for an economic hardship or unemployment deferment.

Most of all, stay in touch with your college's financial aid department — they can be a great resource.

 

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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