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Waiting tables and working summers for a surveying firm gave David Hilmer a nice nest egg for college at the University of Wisconsin, Madison. Although the money he saved was a good start, it was not enough. “After about a year and a half, I was scrambling–thinking how I was going to cover my dorm expenses and tuition,” he recalls. Now working as the director of business development at Little Tornadoes, an Internet consulting firm in New York City, Hilmer looks back and says that student loans (a federal Perkins, Stafford, and a university loan) enabled him to graduate.

With the high cost of a college education today, it is no wonder students are relying more on loans than ever before to help them make ends meet, according to the College Board. The good news is that interest rates are currently at record lows of less than 3 percent on the Stafford.

To make smart decisions about borrowing, you still need to plan ahead now and understand your options when it comes time for repayment. Here are some simple guidelines that apply to the major federal loan programs–the Perkins, the Stafford, the PLUS–as well as independent bank loans. (For more specifics on programs, see page 8.)


Keep in mind that every dollar you borrow must be repaid, with interest, which can really add up over a 10-year (or longer) repayment term.

“It’s easy to think a $200-a-month payment is not a big deal, says Hilmer “but those payments can take a big chunk out of your monthly income, and you’re going to need to pay your bills.”

To get some idea of how much is too much, you need to estimate how much you’ll be able to pay back once you graduate. That involves estimating your future salary and expenses.

The best way to do this is to use a budgeting calculator available on the Web site of a major lender, such as Bank of America (www.bankof or Chela ( Calculators let you estimate monthly expenses–rent, utilities, food, clothes, car payments, insurance, etc. Then you compare those expenses to your estimated salary. Some calculators provide salary info, or you can find Bureau of Labor Statistics salary averages at By subtracting your estimated expenses from your estimated salary, you can predict how much you can afford in monthly loan payments.


If you do wind up borrowing more than you can afford, you run the risk of defaulting, or failing to pay back your loan according to agreed-upon terms. These terms are specified in a promissory note, a legal document that binds you to make regular payments.

Default usually results after you miss payments for 180 days. Many defaulted loans are sent to collection agencies that may charge costly late fees and take money from your wages. Worst of all, a defaulted loan can haunt you later because it will be recorded as part of your credit history for seven years. Lenders refer to your credit history when you apply for any major loan.

“Credit bureaus keep close tabs on delinquencies,” says Tom Lustig, vice president and director of marketing at PNC Bank. If lenders see you have a defaulted loan, they may deny you a mortgage, car loan, credit card, or personal loan, or charge a higher interest rate.

Most lenders provide students with charts to help track repayments. Keep in mind: If you can’t make a monthly installment, immediately contact your lender or servicer (the company that owns your loan) to discuss the problem. Plus paying on time has further advantages–many lenders will give about a 1 percent discount to students who make


Knowing the terms of your loan–the conditions by which you have borrowed and are obligated to repay the money–can help you avoid default. But first you should start by understanding some basic loan terms:

Grace period. A period of time–usually lasting six months after you leave college–when many student loans don’t require repayment. After the grace period, a deferment or forbearance can temporarily suspend repayment.

Deferment. A period when a borrower who meets certain criteria may temporarily stop loan payments. Depending on your type of loan, the federal government may pay the interest on it during your deferment period. New borrowers might be eligible for a deferment if they are still enrolled in school half-time or full-time; unemployed; studying in an approved graduate fellowship or rehabilitation program for the disabled; or experiencing economic hardship.

Forbearance. The temporary suspension of repayment in cases of hardship. Anyone with student loans may claim forbearance for six months at a time, for up to a total of three years, but interest still accrues.

Loan consolidation. Combining several loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. Consolidation can lower the monthly payments and extend the repayment period to a max of 30 years, but you’ll pay more interest.

“Even if you have one loan, you can use consolidation to lock in a low rate.” says Shawn Lindstrom, president of He adds that lenders offer incentives and interest rate reduction plans, so it pays to shop around.

All in all, loans can be a viable option for paying for college, as long as you borrow within your means and keep up with repayment.


If you're taking on a student loan, you
may want to compare your debt burden
to that of a college senior graduating
from a four-year private college.


Source: Sallie Mae

The Lowdown on Lenders

Check out the offerings from these top lenders.

Bank of America (

BofA offers a personal Education Maximizer loan of up to $30,000 a year and online planning tools let you calculate a budget, estimate repayments, and more.

Educaid (

Once you start repayment on two or more Stafford or Plus loans, you can start to receive percentage rebates that increase over time. Educaid also offers its own low-cost private education loan.


Check out the P N C interest-reduction plan for when you enter repayment. Also, PNC touts a delayed payment plan for PLUS loans.

eStudentLoan ( The unique loan finder will match your specific needs with up to 22 loans programs from top lenders.

AllStudentLoan ( Get instant pre-approval on the PLUS and try online loan counseling.

NextStudent ( The site features a loan adviser, scholarship search, and loan comparison tool.

Key Bank ( Click on “Education Loans”) Key Bank offers a range of educational loans as well as an education e-mail service featuring the latest education tips and tools.

The Direct Loan Program at offices/OSFAP/DirectLoanlindex.html

At some schools, students can borrow directly from the federal government. Find out more at this site.

Don Rauf is editor of CARRERS & COLLEGES.

COPYRIGHT 2004 EM Guild, Inc.
COPYRIGHT 2005 Gale Group

This Financial Services article was written by Don Rauf on 6/1/2005

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