More Tips on Student Loans

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Too many college loan borrowers give too little consideration to the implications of signing on the dotted line.

To parents and students alike, I have one, simple piece of advice when it comes to borrowing for college: Pay attention.

It's clear to me from the volume of e-mail I received over the past week that too many college loan borrowers give too little consideration to the implications of signing on the dotted line.

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Consider these snippets from a few of the e-mails I received: - I have been paying my loans for 9 years, yet due to the interest accumulated, my loan keeps growing. It has gone from 23K to 38K.

- So in 1999 I owed $42,000 and today in 2009 I owe $170,000.

- That's a total of 6 loans that we are currently making payments on. We don't make a lot and it starting to take a toll on our financials.

- Now the government says I owe them a total of $48,159.

- I've had to keep deferring repayment for years, so now I face payments of $275 a month for a 25 year term.

The e-mails came in response to a column I wrote last week outlining the new federal Income Based Repayment plan designed to help former students struggling to pay back college loans on modest salaries.

In some cases, my unsympathetic response boiled down to this: That's why they call them loans; they have to be paid back.

True, in many cases, that's harsh. The truth is I do sympathize with those who need to borrow money to finance the outrageous cost of higher education in this country.

I graduated from college with my own student loan debt (since paid off), and now my wife and I are paying down the money she borrowed to attend graduate school a few years ago. So I know what it's like make a monthly student-loan payment.

But what was clear to me in reading more than three dozen e-mails about college-loan debt is that many borrowers – both students and parents – do not pay attention to the details of borrowing to finance a college education. Then a few years down the road they find themselves in a bind.

Student Loans: How to Stay Out of Trouble

To reduce the chances of finding yourself in such a bind, here are a few things to consider before signing student loan documents:

- Not all student loans are created equal. There are vast differences between the many types of college loans out there. It's your responsibility to understand the differences between a subsidized and unsubsidized Stafford loan, between a PLUS Loan and a Perkins Loan. Most important of all, be very careful about taking out a private student loan compared to a federal student loan. Private student loans are the least generous in their terms and rates and often do not qualify for programs like the new Income Based Repayment.

- Interest accumulates. In most cases, interest on student loans begins accumulating from the day the loan is taken out. That means if you borrow $10,000 at a 5-percent interest rate, you will owe $10,500 at the end of one year if you make no payments during that period. At the end of two years, you would owe $11,025.

Keep this in mind before applying for forbearance, which allows a borrower to defer payments until a later time but doesn't stop the interest clock from ticking. Income Based Repayment also could lead to additional interest payments, depending upon on your circumstances.

- Career plans matter. The harsh reality is that career plans should influence how much you borrow and therefore where you attend school. For somebody planning to become a physician, the decision to borrow $100,000 to attend medical school is a reasonable financial decision. Borrowing $100,000 to become a social worker may not be. That's not meant to discourage future social workers; rather it's meant to encourage them to think twice about where they attend college.

- Graduate on time and on budget. In working with clients, I've come to the conclusion that one of the worst things children can do to their parents is to stretch out their undergraduate careers far beyond what they should be. Before deciding to lighten your class load each semester, think about what it will cost Mom and Dad.

And one of the worst things students can do to themselves financially is to borrow heavily to attend college and then finish without a degree. That means you acquire all of the debt without the means to pay it off in a reasonable time. Before signing the loan documents, make sure you are committed to finishing what you start. That doesn't mean you can't or shouldn't alter your path along the way. Just make sure you have something to show for the expense in the end.

Yes, student loans are a necessary evil for many of us. But know what you're getting into first. Watch the details.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at