This article was updated on February 27, 2024. It was originally published on May 20, 2021.
Putting the Student Loan Problem in Perspective
In total, almost 45 million Americans owe about $1.75 trillion in student debt. About 70 percent of college grads have student debt when they graduate. The average debt among 2021 graduates (bachelor recipients) at all nonprofit colleges is about $29,000.
These statistics may look really scary, but the story is more complicated than “everyone’s crippled by their undergraduate student debt.” For example, student loan statistics are skewed by the small percentage of borrowers who owe over $100,000 and the fact that graduate borrowers tend to borrow MUCH more than undergrads.
That being said, you should not take out loans until all other options are exhausted. Why borrow money for college when you can get other people to pay for it?
There are so many other strategies you can employ before taking on debt!
Strategies to Minimize Student Loans
1. Learn how the financial aid system works. Then, determine whether you can maximize need-based aid.
The federal government plugs in the info you submit on the FAFSA into a formula called The Federal Methodology which heavily focuses on income. This calculation spits out your SAI (Student Aid Index). The SAI is often pointed at as the number your family will pay for college. This is inaccurate. Rather, this number is used by the federal and state governments as well as colleges to determine your eligibility for need-based aid.
Don’t know what your SAI is? Use our SAI calculator!
Another methodology, the Institutional Methodology, is used by colleges that require the CSS Profile. The CSS Profile is used primarily by private colleges and some flagship state universities to delve further into your family’s finances and create a more accurate picture of your family’s financial need.
All of this can be quite overwhelming, especially with all its rules, formulas, and weird terminology. If you can keep your head up and make your way through the weeds, there are several financial planning strategies you can use to lower your SAI. We recommend meeting with someone who understands the system and can walk you through it. If you do not have anyone, feel free to reach out to our college funding experts, who know the process and can help you move forward.
2. Submit the FAFSA and do so earlier rather than later.
The Free Application for Federal Student Aid opens on October 1st every year except for this year when the FAFSA opened late due to the substantial changes from the FAFSA Simplification Act.
Submitting the FAFSA opens up the door to possible federal and state grants, as well as work-study and federal loans. A good portion of the aid is awarded on a “first-come-first-served” basis, so the sooner you apply, the better your chances.
Some families believe there is no point in filling out the FAFSA because they make too much money. What many don’t know is that colleges often require the FAFSA to determine merit aid packages. Additionally, federal unsubsidized direct loans are offered regardless of need.
Of course, no one really wants to take out student loans. However, the ability to take out a low-interest loan may be a useful tool to keep in the back pocket. Some parents who have the capacity to pay for their kids’ college also want their children to have some skin in the game.
3. Appeal your financial aid letter.
If you have gotten into a school, they are more likely to try and help you with affordability. Check the school’s website for their appeals process.
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- Provide evidence of any financial changes in your family life since application – (change in income, another child in college, medical expenses, etc.)
- Leverage offers from similarly tiered schools
- Market accomplishments and special skills that might round out the class
- Bonus Tip: Make sure to appeal if you have multiple kids in college. The colleges still have discretion here despite the removal of the “discount.”
It should be noted that if you go into this process as if you are negotiating in a used car lot, you will be sorely disappointed. Provided in the links are some general guidelines and tips for submitting a strong appeal:
READ: The Financial Aid Appeals Process: A Guide to Everything You Need to Know
READ: 8 Tips for Writing a Succesful Financial Aid Appeal Letter
4. Compare colleges based on net price or out-of-pocket costs, NOT sticker price.
One of the biggest headaches in the college planning process is figuring out how much each college actually costs. We are now in an age where the cost of attendance at some private colleges has crested $70,000 a year!
But, depending on the school, your financial situation, and the academic record of your student, this may be much more than you will actually pay.
The process is notoriously opaque. Here’s an old but fantastic explanation of how college pricing works and how you can figure out what you will pay.
5. See if you are eligible for The American Opportunity Tax Credit.
The American Opportunity Tax Credit is a $2500 per year tax credit for taxpayers who have paid $10,000 or more to a college. There are income limits for this credit: households with over $160,000 in adjusted gross income will not qualify.
6. Apply for the right private scholarships without sacrificing quality or sanity.
Most people don’t realize that you can apply for private scholarships well before senior year.
To prevent senior year burnout, make a schedule earlier in high school (most experts recommend junior year) and help your student identify scholarships that relate to their skills, interests, and passions.
We’ve met plenty of parents who have gotten creative with incentivizing their students. It can be done!
As emphasized by our friends at The Scholarship System, do not overlook the small, local scholarships in your community. These are far less competitive than the brand-name national scholarships that thousands apply to. A great way to start is to locate scholarships by using keywords and locations in your Google search.
You want to be the scholarship sleuth! Uncover those scholarships that are not widely publicized. Check everywhere you can think in your area: local businesses, chambers of commerce, churches/religious organizations, community organizations, etc.
READ: And the Award Goes to Students That Apply to Scholarships
Remember to apply for scholarships and grants throughout college. Even if you don’t receive a scholarship before your first year of college, there are many opportunities to apply for scholarships during the school year.
Not sure where to start? Check out a couple of the many scholarship engines to get your feet wet. We like these two: Scholarship Owl and Going Merry.
7. Commute to college.
Many will argue that this takes away from the “college experience,” but you will save thousands of dollars by not paying for housing and even a meal plan.
Is it worth the money to live on or near campus all four years? That’s for you to decide.
8. Consider community college.
Just as above, this is looked down upon for similar reasons. Consider the following:
- It is a fraction of what a four-year university costs.
- It may allow you to make up for a lackluster high school resume to bolster the chances of being accepted to your top school.
- If you’re uncertain about whether college is right for you, community college offers less financial risk while figuring out what you want to do.
9. Find the right financial fit
Be smart about where you apply to school.
Start by looking at in-state public schools, but don’t linger. Many of us perceive that in-state public schools are the cheapest, but that is not always the case.
This goes back to the sticker price fallacy mentioned above. Many parents focus on low sticker prices and overlook private schools; although private colleges tend to have exorbitant sticker prices, they are often quite generous with both need-based and merit aid.
Some out-of-state public schools in the middle of the country can be affordable as well because they want to attract good students. Will your student qualify for a tuition exchange program or state reciprocity agreement?
Is your student interested in the college you went to? Check if they offer legacy scholarships.
Research generous schools
Understandably, many students and parents want to get into the most prestigious schools. The out-of-pocket costs to pay for these elite colleges, however, are becoming prohibitive. If you have an excellent student and will probably qualify for need-based aid, then sure, apply to these schools.
This focus on prestige presents an issue. Many families do not incorporate the financial aspect into college fit. They just want to get into the best schools and worry about paying later.
If you want to save on college costs and probably won’t qualify for need-based aid, you should focus on schools that offer generous merit aid. If your student has a strong academic record, then some colleges will literally throw money at them to attend. Research schools where your student would be in the top 25% of their class. Does your student have a special talent, skill, or passion that colleges are looking for?
There are more than 5,000 colleges and universities in the US. Move past the brand-name schools and look for colleges off the beaten path.
Make sure to apply to several colleges within the same “tier.” You can often leverage their financial aid packages!
10. Graduate in three years.
This is one of the more underrated and less discussed strategies. You pay for one less year of college AND start making money earlier than your peers? Not too shabby.
Not sure how to do this? Here’s a guide that walks you through the world of CLEP Tests, Dual Enrollment, summer classes, and all the rest.
11. Get your undergrad degree in four years or less.
You would probably be shocked by the number of students who do not finish their undergraduate degrees within the typical four-year timeframe.
The financial impact is substantial since it usually requires more debt, and there’s a massive opportunity cost in terms of the income the student could be making if they had graduated on time.
12. Attend a federal service academy or join ROTC.
Federal service academies are quite selective, but if you can get a nomination (required by 4/5 academies, the Coast Guard Academy being the exception) and have the academic record to get in, they will pay your tuition and room & board in exchange for a service commitment after graduation–typically at least five years.
An alternative to attending a federal service academy: consider joining an ROTC program. The Reserve Officers’ Training Corps offers tiered scholarships that come with proportional service commitments. Contrary to popular belief, you still need to qualify for these scholarships. There is a finite number of them, and the requirements vary by branch.
13. Consider whether college is the right move for YOU. Seek out alternative paths if necessary.
Our society continues to propagate the idea that everyone should go to college.
Don’t just go because “it’s the thing to do.”
College is not for everybody. Weigh all the risks. Consider things such as the opportunity cost of taking out loans and dropping out.
Think about what’s right for your student from a personal and financial standpoint. There are alternatives out there.
14. Put together a sound financial plan as early as possible.
The best way to cut college costs and reduce the need for loans: save early, often, and efficiently. Set realistic expectations and integrate your college funding plan into your comprehensive financial plan.
At The College Funding Coach, our independent experts incorporate paying for college within a wider financial planning system so you don’t bankrupt your future to put your child through college.
Concluding Thoughts on Student Loans
It is not irresponsible to use loans to help pay for college. It is irresponsible to take on a large amount of debt without a plan in place to handle it.
Loans have made the college dream a reality for many students. Without them, many Americans would not have had the opportunity to land a great job or get started on a specific career path.
On the other hand, student debt has hamstrung many financially, to say nothing of the psychological toll it has inflicted on generations of students; many graduates, struggling with debt, face an uphill task when renting an apartment, buying a car, and saving for retirement or their kids’ college.
Here are four general rules of thumb if you need to borrow to pay for college:
- Use student loans cautiously after all other channels have been exhausted.
- Do not take out more in debt than your estimated salary in your first year out of college.
- We would go even further and say this: considering the unpredictability of the future, it is wise to lowball this number.
- Start with federal loans, then move to private loans if necessary.
- Note: If you are thinking about using Parent Plus Loans, check to see if you can get a better rate on a private loan.
- Understand how the loan works before signing. (e.g., Are there servicing, origination, or other miscellaneous fees? Do you have to make payments during college? How is interest calculated and capitalized?)
Read: Navigating Your Undergraduate Student Loan Options Wisely
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