If you need to take out a private student loan to pay for your education, then you may want to consider a more affordable college, says Suze Orman, financial expert, bestselling author of "Women & Money," and host of the "Women & Money podcast.
"The only student loans, truthfully, that you want to take out are Stafford loans," she says. "If you're going to a school where you have to take out more than the maximum that the Stafford loans allow you to take out, I'm here to tell you that you're going to too expensive of a school."
Orman shares with Grow the two key rules she thinks both college students and their parents should follow when it comes to student loans.
Approximately 44 million Americans are shouldering the burden of student debt. But depending on the type of loan you have, your debt may be harder, and more costly, to pay back.
The two most common types of student loans are federal and private. Federal, or Stafford loans, are provided by the government, with terms and conditions that are set by law. They include benefits such as fixed interest rates and income-driven repayment plans.
Private student loans, however, are made by providers such as banks, credit unions, and state-based organizations, and the terms and conditions set by the lender, which means interest rates vary and can climb as high as 14%.
Federal and private loans also differ in terms of repayment structure. While college graduates typically have a six-to-eight month grace period before they must start repaying their loans, private student loans often require borrowers to make payments while still in school. Regardless, Orman advises parents and students to stay away from them.
That's in part because even if you can't pay back those loans later in life, you're still on the hook for them. "What you have to understand about student loans is that they're not dischargeable in bankruptcy" most of the time, Orman says, "so do not take out more than you can pay back."
Many parents share the burden of student loan debt with their children — in particular, when they take out private loans in their name to help their child attend their dream school. But, Orman says, taking out private loans to cover the gap between the price of tuition and what federal loans will cover may cost students — and their parents — in the long run.
If you're a parent funding all or part of your child's education, Orman say to follow one rule of thumb: Do not borrow more than your annual salary to cover educational costs for all of your children.
"Put yourself first," says Orman. "Put the financial oxygen mask on your face first before the kids."
Nearly 9% of parents who began repayment in 2014 owed more than $100,000, and at least 3.4 million people hold Parent PLUS Loans and owe a total of nearly $90 billion, according to a report by the Brookings Institution, a public policy research group.
Parents who want to teach their kids to be financially responsible, Orman says, can lead by example. "If you want to raise smart money kids, show them what it means to be a powerful parent," she says. "Don't just tell them what to do, show them what to do."
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