Making the Most of Student Loans
Money Management – November 2008
This is the time of year when many high school seniors are finalizing their decisions about which
colleges they will apply to. That means that it’s time for their parents to give serious consideration to
how they are going to pay for that college education. The Missouri Society of CPAs provides some
smart financing ideas to follow.
MORE THAN JUST TUITION
When you are trying to determine how much money you’ll need for college, consider not only tuition
and room and board but also books, supplies, personal expenses and transportation costs. Recent
graduates left college with an average of $19,646 in student loan obligations, according to a study
by the Project on Student Debt. That’s a lot of debt for a young person starting his or her career, so
only borrow the minimum amount that you will need to cover your costs. Help your child resist the
temptation to take on more student loans to pay for vacations or other items that are unnecessary.
SET A LIMIT
How much is too much when it comes to student loans? CPAs recommend that the student loan
payments that you make after college should equal no more than 10% of your monthly income. So,
if you expect to earn $3,000 a month once you graduate, for example, your monthly loan payment
should be no more than $300 per month.
When you apply for a student loan, ask the lender to provide the expected monthly loan payment
amount, based on the interest rate and the loan term. Estimating the student’s post-college income
will be a little harder, but it is possible to come up with a reasonable estimate. Start by talking to
friends or family who are new grads with jobs in the field in which your student is interested. You
can also check with local employment agencies or online job search sites to find out what new hires
are earning in your student’s desired field. This probing will give you a sense of whether your
student will be in a good position to handle the loans after graduation.
UNDERSTAND YOUR FINANCING OPTIONS
There are many options available to you to help finance college education. Your first step should be
to check out whether you qualify for government-sponsored loans, which generally have the most
attractive interest rates or payment options.
There are three different types of government-sponsored loans. Stafford and Perkins loans are
taken out in the student’s name. Another option is the federal PLUS loan which allows parents to
borrow up to the total cost of the college education, even if their children already have Stafford or
Perkins loans. Be aware, though, that the interest rate for the PLUS program is higher than for
Stafford or Perkins loans. So, determine first whether a Stafford or Perkins loan will cover your
needs. Not only are the rates lower, but your child also may be able to deduct his or her interest
payments on these loans, and a future employer may be willing to pay off some of the student’s
college debt. You can find out more about the specifics of each loan program online at
www.federalstudentaid.ed.gov.
YOUR CPA CAN HELP
Your CPA can answer your questions on education loans and on the best choices for you and your
family. Turn to your local CPA with questions about any financial issues facing you and your family.
To find a CPA near you, visit http://www.mocpa.org/public/referral/findcpa.aspx.