The concept of borrowing thousands in student loans can trigger immense anxiety. Well, at least for most of us. The thought of climbing a mountain of debt for several years is a terrifying thought. And the thought of your college degree being unattainable without borrowing is a hard pill to swallow.

But the sad reality is that a college degree just isn’t possible for some of us without borrowing the funds to pay for it. No matter how hard we worked in school, it’s inevitable for some of us that we will have to borrow money for college.

Life has given some of us a different hand of cards in comparison to our peers. We may not be fortunate enough to have had opportunities for full-ride scholarships. Or even be lucky enough to have sound financial support from our parents.

But, you play the cards you’re dealt. And playing those cards means you have to go the route of borrowing student loans. As scary as it sounds, you can borrow smartly and lessen the stress of being a student loan borrower.

Shoot For The Freebies First

I’ll lay the most obvious piece of advice out first. Go for the freebies first. The “freebies” as in the money that you don’t have to pay back. The biggest way to be a smarter borrower is to lower the amount you need to borrow.

This process starts with utilizing any free money you can rake in. Free money for school is typically in the form of scholarships and grants.

Scholarships 

Scholarships are awarded based on merit or other achievements. You can get scholarships for a ton of things. Things from academic achievements to participation in extracurriculars like sports and clubs.

There are also some need-based scholarships offered privately or by donors. These types of scholarships usually require you to meet certain criteria for consideration. The criteria can range from things such as demographics or financial status. And yes, it is true, you can even get a scholarship based on race, gender, sexual orientation and more.

Also donor-based, you can get college, career, or major-specific scholarships. And, some states and education systems even offer generic grade based prizes or awards. These awards stick with you for a set period of time, typically four years.

Scholarships range from a few hundreds of dollars to the full cost of tuition. They are also something you most often have to seek and apply for. Where can you find scholarships to borrow? Start by contacting your school’s financial aid office or by utilizing websites like scholarships.com.

Grants

Grants are like scholarships in the fact that they are free money. These grants come from a variety of government subsidiaries, colleges, trusts, or non-profits. The key difference is that eligibility for grants is usually determined based on financial need.

In the United States, make sure you do your FAFSA (Free Application For Student Aid) to help determine your eligibility for grants.

Borrow The Absolute Least Amount Possible

Now that you’ve tried your hardest to take advantage of freebies, you may find yourself still falling short. For most of us, a full-ride scholarship is a mere dream. Heck, even having enough free aid to cover half our tuition would be amazing.

But, the sad reality is you’ll likely need to borrow loans to cover your shortcomings. And you should do just that: borrow enough to cover your shortcomings only.

Fight The Urge To Borrow The Excess

The Department of Education allows you to borrow an annual maximum. This max might be more than you need to cover your tuition. And more often than not the financial aid office at colleges will let you borrow every cent of this max.

It’s important to remember that just because the max is available to you does not mean you have to borrow it all. You have the power to accept or reject aid amounts. Avoid borrowing just to get some spending money while in school.

For example: If your tuition is $6,000 a semester, only borrow the $6,000 you need to cover your tuition costs. Fight the urge to borrow excess for spending money. Trust me, it may be hard now, but this will save you plenty of dollars in the long run.

Borrow The Low Interest Federal Loans First

To borrow smart, take advantage of loans supplied by the federal government first. These are loans offered by the U.S. Department of Education. They come in three forms: Direct Subsidized, Direct Unsubsidized, and PLUS Parent/Graduate.

Specifically, try to borrow the Direct Subsidized loans first. The interest on these loans does not accrue while you are in school. Direct Unsubsidized loans gain interest as soon as disbursement of the loan occurs. This means that unsubsidized loans are more costly over the life of the loan.

PLUS loans exist for both graduate students and parents of students. Designed for more experienced borrowers, these loans have stricter credit requirements. Additionally, you must meet the eligibility requirements as set by the Department of Education.

Consider Private Loans Second

Between your freebies and Federal loans, you very well could be good to go on covering your tuition costs. But, there’s a chance that the borrowing limit on federal loans may leave you no choice but to explore other options.

Private student loans offered by a variety of lenders and banks are definitely an option if you fall short. Private loans also vary greatly from Federal loans. It’s important to know that private loans need to always be your second option.

This is because private loans tend to have higher interest rates than federal loans. Private loans also have stricter credit requirements making them more difficult to get for a lot of students. They also tend to have stricter repayment plans.

Private loans also are not related to any federal programs that may affect repayment. For example, the recent CARES Act/COVID-19 relief suspended accrual of interest on all federal loans through the end of 2020. This is sweet because you can still make your payments on your federal loans but save some dollars on interest. However, private loans were not affected by this program which, if we’re being honest, stinks.

Take The Tax Advantages Associated with Student Loans

Believe it or not, there are some major tax advantages with student loan borrowing. It’s pretty sweet of Uncle Sam to give us student loan debtors a break when it comes to tax time.

Firstly, you can claim the interest you paid on student loans on your taxes. This typically applies to all types of student loans, private included. The maximum deduction is currently $2,500 annually.

Your student loan servicer/lender will provide you a 1098-E annually. You will use this form when filing your taxes to score the student loan interest deduction.

Credits For Tuition and Other Expenses

Besides paid interest, you can also deduct tuition and other education expenses. To deduct your tuition, you have to have paid for it out of pocket or with borrowed funds. This means you can’t claim tuition paid by grants and scholarships.

But this does mean you can claim tuition you paid with student loans. Your school will provide you a 1098-T, which itemizes tuition/expenses paid directly through school. It also typically separates scholarships from loans/direct payments.

Remember that you can also claim your supplies and books that may not appear on the 1098-T tax form. Make sure you keep a list of your expenses and your receipts!

Specific Education Tax Credits

There are two specific tax credits to help offset the expensive cost of college. These are the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit.

The American Opportunity Tax Credit allows an annual credit of up to $2,500 per student. You can claim the AOTC for a max of 4 years during undergraduate studies. You also must be actively pursuing a degree or other education credential.

The Lifetime Learning Credit (LLC) is similar to the AOTC but varies on eligibility. You can claim the LLC an unlimited number of tax years and during all years of post-secondary education. However, the credit is $2,000 instead of the AOTC’s $2,500. Also, the adjusted gross income cap is lower, meaning higher earners can’t qualify.

Budget Before Borrowing

Smart borrowing starts with making other smart financial choices. This includes setting a budget. Sure, it may be tough to set a budget on a college student’s income. But it’s definitely a must for smart borrowing.

By setting a budget you allow yourself to live within your means. You cut the need to borrow excessively. But most importantly, you help shrink that mountain of student loan debt you must one day climb.

Budgets allow you to live within your means and also help form key habits. Analyze your income and expenses, and decide where you can make cuts on non-necessities. Try to make room to pay for books or supplies out of pocket. Or skip the university’s expensive meal plan and make your meals at home.

Work a Part-Time Job or Side Hustle

Depending on your field of study, you may have enough time and energy to manage working a part-time job. Or if it floats your boat, consider a more self-driven side hustle. Working not only allows you an income to afford necessities, but it’ll also allow you to save on the need to borrow.

You are on the right track if you are able to scrape in enough money to pay for your rent, bills, and necessities. This allows you to borrow less, as you don’t have to take the route of borrowing funds to cover housing and living expenses.

There’s a real bonus if you are able to pay for some of your tuition out of pocket with the money you earned from working. Plus there are a lot of other advantages to working through school too. For example, working helps you gain experience and establish your work ethic. It also helps prepare you for the “real-world” workforce. 

Sign Up For Automatic Payments

If you have income, consider setting up automatic payments as soon as possible. The sooner you are able to start repayment the better. You will save hundreds, or thousands, on interest if you can start making payments right away.

It’s also common to see an interest rate reduction for setting up automatic payments. This typically depends on your loan servicer/lender, but it’s usually between 0.25% and 0.50%. While it may seem small, this reduction can also save you lots over the life of your loan.

It’s likely you are unable to make a full monthly payment while in school. And that is completely okay! If that’s the case, shoot for interest-only monthly payments. That is if you have loans that actively gain interest while you are in school, of course. The payment amount will be manageable, while also helping reduce the burden of interest accrual.

Know Your Starting Salary Goals

Finally, to borrow smart you need to have an idea of how much of a monthly payment you can afford once you hit repayment. This means you need to set a target starting salary once you enter the workforce.

Is your degree going to cost you more than it’s worth in your industry of interest? A good rule of thumb is to try to borrow less than the expected annual starting salary for your field.

Do your research. Check out specific jobs in your field that pique your interest and compare the salaries. There are tons of resources out there that outline current and projected salaries.

Not factoring income, you can calculate your estimated loan payment here. To factor in your estimated income, you can calculate your estimated payment here.

The Bottom Line

The thought of borrowing student loans can be a very overwhelming thought. In fact, it’s a dreadful thought. Borrowing loans to fund your education may be non-preferred for most. But for some of us, it’s inevitable. You can face this reality all while being smart about borrowing.

Check your scholarship and grants options first. Borrow only what you need for school and borrow the federal loans first. Don’t forget to utilize the tax credits on both paid interest and tuition. Set a budget and do your best to work through school. And finally, know your starting salary and career goals. Keep these things in mind and you will be on the right track. And remember: You have the power to be a smarter student loan borrower.