Give yourself credit: Add student loan debt cautiously

I know, you’re on summer vacation – but school bells will be ringing soon enough, and more importantly, the next couple of months are when most students will be finalizing their student loans.

Today, some 60 percent of people go to college, and two-thirds of undergraduate students graduate with some debt.

They started the process by completing the FAFSA or Free Application for Student Financial Aid. The absolute final deadline for the previous year is around this time — July 2, 2007, for the 2006-2007 school year, and June 30, 2008, for the 2007-2008 school year. But don’t get too excited thinking you have a whole year — most schools require the FAFSA to be submitted in January for financial aid the following autumn.

The most common student loans are Federal Stafford Loans. These have annual limits on how much you can borrow, and you’re supposed to borrow only to pay for education-related expenses (tuition, fees, books, room and board, and some related items, like a necessary computer). The limits for an independent student (not relying on parents for support) are:

  • Freshman year – $7,500
  • Sophomore year – $8,500
  • Junior or senior year – $10,500
  • Graduate or professional – $20,500

There’s a lifetime limit of $46,000 for undergraduate students and a limit of $138,500 for grad students.

The interest rate is fixed at 6.8 percent — and the good news is that within certain income limits, interest paid on student loans is tax-deductible. (Here’s the IRS take on what is deductible.)

Most loans have 10 years for repayment. If you borrow the maximum every year, graduate this month, and start repayment when your six-month grace period ends in December, you’ll have payments of $529.37 per month for the next 10 years, and you’ll pay $17,524.34 in interest. You could pay less interest by adding more to the payment each month, but with that whopping figure (and college grads in business earning an average starting salary somewhere in the $40,000s) that’s not so likely to happen.

But wait. An average four-year public college costs $5,836 per year (I think that’s tuition and fees, but the Web site isn’t clear on that).

If you’re actually an independent student, chances are you’re working to pay your living expenses. Save many, many dollars by not taking that full student loan. (Borrowing $6,000 a year for all four years would set you back $276.19 a month for 10 years, with $9,143.14 in interest paid — and if you invested the difference and earned 7 percent, you’d have $43,821 after the 10 years ended. Leave that balance in a retirement account for another 30 years and without adding a dime, you’d have about $356,000.)

Most important for managing this technique: Watch your student loan checks carefully. This is anecdotal, but based on first-hand experience: No matter what amount of student loan money you request, you’re likely to receive a check for the full amount for which you are eligible. Lenders know that once you have those thousands of dollars in your hot little hands, it’s hard to give it back.

Give it back.

If your check is for more than you requested, contact your school’s financial aid office. Then contact your student loan lender. They will tell you how to return the money so that it is never credited to you as a loan amount.

If you need the money, you need it, and in that case borrow. But borrow judiciously, because money never borrowed is money in your pocket — and how worse to borrow than unintentionally?