Student Loans: How Much and What Kinds?

Paying for school

The average undergraduate leaves school with nearly $20,000 of debt according to a recent study cited in the USA today. A 2002 council of graduate schools poll shows that graduate students are much worse off--Master's students average more than $25,000 of debt while PhD students are carrying more than $35,000. It is common in professional degree programs (medical, law, and dental school) for students to be strapped with $100,000 or more of debt by time they finish.

While these numbers may seem scary to some, they aren't necessarily all that bad. Student loans taken to pay for a good education are a great investment. The problem is that so many students aren't putting that money to good use. It is easy to squander and party the money away, taking several extra years (and thousands of dollars) to finish a degree program. There is also a lot of useless debt that many undergraduates latch on to—usually in the form of plastic.

Credit Card Debt

There is no excuse for using credit cards to finance your education. You should know by now that your worst enemy is the plastic you keep in your wallet. Now—having a credit card and establishing a good credit history while in school is a very good idea... if you can do it without becoming a slave to the card. But there is never a need for fifteen cards. Two or three should be more than enough (I have one that I rarely use and my credit score is about as good as it gets).

While some studies show that the average credit card dept is hovering around $8,000, I suspect that the average is really much lower (an article posted in MSN money supports this). I was shocked to learn that Nellie Mae, the nation's largest maker of student loans, says the average undergraduate has $2,200 in credit card debt while graduate students carry about $5,800. (see article). That balance is much more than the average student is saving for retirement, and represents something that is very wrong in campuses across the country. The minimum monthly payment on a credit card debt of $5,800 would be $145. It would take 27 years to pay that off and you would pay $8315 in interest (using the average 18% interest rate). Lesson: don't carry a credit card balance... pay it off!

Pell Grants and Free Money

It may not be easy to pay off your plastic until you get other funding to replace those costs. I recommend starting with free money. Undergraduates have quite a few options starting with applying for scholarships before you start college as well as applying for academic and other scholarships awarded to existing students. Inquire at your student advisement center to see what kind of scholarships are available.

Almost as good as merit-based scholarships is need based aid awarded by the federal government. These Pell grants are relatively easy to apply for and are generally awarded to students whose parents have small salaries or are no longer claimed as dependents on their parents’ tax forms. A Pell Grant, unlike other grants and loans, is a loan that never has to be repaid… it is more like a scholarship provided by the government because they want you to be in school. You apply for these grants by filling out a FAFSA, and indicating that you wish to benefit from the grant.

Options for Graduate Students

Pell Grants are not available to graduate students but various other grants are. Funding is often provided to graduate students (especially those pursuing a PhD) in the form of a Graduate Assistantships and Fellowships. An assistantship usually entails working with a professor or in a lab for 10-20 hours a weeks, doing research that you should be doing anyways. In return your tuition is greatly reduced or paid for completely and you are generally given other small benefits (like health insurance) and a small stipend to live on. Fellowships involve teaching undergraduate courses with similar compensation but probably a slightly higher living stipend. Fellowships are generally reserved for higher level graduate students.

Stafford Loans

Once you’ve applied for free money (scholarships, pell grants, bugging your parents), and work-study money (assistantships and fellowships) and you find your still a little short—you need to start looking at student loans. You should first apply for Stafford loans. These federally funded loans are a great option. Start with their subsidized loans. The government pays the interest on these loans while you are in school. Then you start making interest payments but not until six months after you’ve graduated or left school, and these interest payments are much lower than most other loans you can qualify for (currently around 6%). If you need even more money try unsubsidized loans. You don’t have to pay on these while in school but the interest does start accruing right away.

If you still need money you can apply for loans from individuals, banks, etc. but if you’re to this point you probably need to make a lifestyle change: start living within your means.