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Determine How Much You Should Borrow
There are many hidden expenses when attending school. Besides paying for the yearly tuition, students also have to pay for books, food, board, transportation, and many other living expenses. There is virtually no way to avoid borrowing money. However, budgeting your spending will allow you to borrow less.
by Carina Zaragoza
When it comes to paying for college or graduate or professional school, there are many things to consider. Yearly tuition is but one factor that will determine how much to borrow. Books, fees, room and board, and living expenses must also be accounted for. This is not an exhaustive list. There are many hidden expenses that should be added to your budget. And that's the key word here: budget. It is crucial to plan a budget even before choosing which schools to apply to. Prospective students must look at their options realistically. Sure, it would be nice to earn a degree from Columbia University, but can you afford to live in New York? It is possible with the help of lots of private loans. But those loans must be paid back, and the last thing anyone would want is a student loan debt twice his/her starting salary. Thus, it is important to factor in the average cost of living of the city where the school is located. A lifestyle change will most likely be necessary. Just because you dine out four times a week does not mean you'll be doing so as a student. Having a $30 meal each week might seem like no big deal now, but over a semester, it will cost you $450. And trust me, that $450 will definitely come in handy down the road. Rather than buying coffee every morning, make coffee at home and bring a thermos to class. Penny-pinching as a student could potentially save you thousands in student loans.

The first step towards determining how much you should borrow is to list the financial resources you already have. This can include non-loan financial aid (such as grants and scholarships), income, savings, help from family and friends, and any other sources (say, the piggy bank you've had since third grade). Be sure to calculate your financial resources yearly. For example, your savings may only cover books for two years, while grandma is willing to write you a check every summer to cover rent. The more meticulous you are about the funds you have now, the less you'll have to borrow (and the less you'll owe).

Next, identify your expenses. This can be a daunting task, as you can't predict the future. Estimates are fine. But don't over-budget. Factor in only direct education expenses and living expenses. Examples of direct education expenses include tuition, fees, books, and supplies. Most, if not all, college and university websites have breakdowns of the costs of attendance for undergraduate, graduate, and professional schools. You can also refer to the school's financial aid office for tips and advice on planning a budget. Examples of living expenses are mortgage or rent, utilities, food, transportation, insurance, entertainment, and personal expenses.

Once you have a rough estimate of the money coming in and the money going out, you'll be able to calculate how much you'll need to borrow. Once you determine how much you'll need to borrow, the first thing to do is look into federal loans. Federal loans have low interest rates and benefits such as interest subsidies. Federal loans can also be deferred while in school and have attractive repayment options. Plus, you can consolidate federal loans to get a fixed interest rate, which can save you money. Once you've exhausted your federal aid options, you can look into private loans. However, if a federal loan meets your financial needs, then do not be tempted to borrow more. The loans you take out should only be enough to cover the difference between the money coming in and the money going out.

To put all this into perspective, let's look at a case study:

Tom H. from Chicago, IL, has been accepted to college at The University of Michigan and New York University. Here are his financial resources:
Income: $0.00
Savings: $4,000 (total)
Help from Family and Friends: $5,000 (per year)
Grants/Scholarships: $2,000 (per year)

The projected cost of attendance this upcoming year (including tuition, fees, rent, and books and estimated personal expenses) for Michigan is $38,031 and for NYU is $44,830. The breakdown is as follows:

  Michigan NYU
Cost: $38,031 $44,830
Funds: $8,000 $8,000
Loans: $30,031 $36,830


As we can see, even using a conservative budget for living expenses, Tom must borrow tens of thousands of dollars each year. Federal Stafford Loans will cover $18,500 each year. If Tom borrows the maximum Perkins Loans each year ($6,000), he will still need to find about $5,500 in private loans each year should he choose to attend Michigan or over $12,000 in private loans each year should he choose to attend NYU.

There is virtually no way to avoid borrowing (unless you receive a full scholarship or benevolent-and wealthy-Aunt Tiddy cuts you a check). But creating a budget will help you borrow less.



 


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