How to Limit Student-Loan Debt

Follow these six steps to keep borrowing for college under control.

With the volume of student loans on the rise, “fears of a bubble in educational spending are not without merit,” warns Moody’s Analytics in a recent report. Moody’s sober assessment: “Unless students limit their debt burdens, choose fields of study that are in demand and successfully complete their degrees on time, they will find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place.”

Amen. In my previous column, I gave graduates advice on how to ease their debt burden. But the best strategy is to limit how much you borrow in the first place.

Choose a school that fits into the family budget. Families seem to be learning that picking a school is an economic decision as well as an academic one. In a survey by, 45% of students ranked “quality of major” as their top reason for choosing a school. But “scholarship or financial assistance” (43%) and “total costs” (41%) came in a close second and third -- even higher than “academic reputation” (38%).

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Among students who leave school with no debt, 85% graduated from public colleges, according to a report by Mark Kantrowitz, publisher of and Selecting an affordable school doesn’t have to mean sacrificing quality. To find public and private schools that deliver both, see our Best College Values special report.

Bypass the four-year route. Starting at a community college and transferring to a four-year school can save a lot. You can also slice a year off your expenses if your child takes Advanced Placement courses in high school or qualifies for college credits through the College Level Examination Program.

In Kantrowitz’s study, half the students who graduated with no debt graduated from a community college (one-third graduated from a public four-year college). Other hallmarks of students who graduate debt-free: They tend to spend less on textbooks -- $1,000 or less per year (see How to Cut College Textbook Costs in Half -- or More) -- and are more likely to live at home with their parents.

Use money you don’t have to pay back. It’s never too late to save, especially if you live in a state that gives you an income tax break for contributions to state-sponsored 529 plans (find the best 529 plan for you). Visit to look for scholarship and grant money from schools and other sources where your student’s grade point average or other achievements would make him a standout (for inspiration, read about a student who put himself through school with zero debt).

If you must borrow, borrow smart. Start with government-sponsored loans, which offer flexible repayment options -- such as lower payments and deferral -- and fixed interest rates. These include Perkins loans, for eligible students, and Stafford loans, which may be subsidized if your student qualifies. Also look into PLUS loans for parents or a home-equity line of credit. (For more information on student loans, go to With that combination you shouldn’t need private loans, which carry a variable interest rate and generally require a co-signer (see Be Wary of Private Student Loans).

Apparently, many students don’t realize that federal loans are the most attractive. “A majority of undergraduates who take out risky private loans could have borrowed more in safer federal loans instead,” reports the Project on Student Debt.

One of our young staff members here at Kiplinger told me that the financial-aid office at his college steered him to private loans before he had exhausted his federal borrowing. He spotted the mistake, but not every student is so savvy. The Project on Student Debt found that “counseling and information at critical decision points can really help borrowers make smarter choices.”

It’s also smart to pay all or part of any loan interest as it accrues so that it isn’t added to the balance that has to be repaid. And remember that even the best student loan can be a dual-edged sword, encouraging a student to borrow more than he should.

Know what you’re getting into. Use the Student Loan Advisor calculator at It provides an estimate, based on starting salaries of various professions, of the maximum in student loans your child should take out and how much it will cost to pay it back.

One rule of thumb is that students should try to limit their total borrowing to no more than their expected starting salary when they graduate. FinAid warns that “if you borrow more than twice your expected starting salary, you will be at high risk of default.”

Choose a marketable major. Moody’s is right on the money in suggesting that students pick fields of study that are in demand. That doesn’t mean your child has to major in engineering or computer science. But if she’s majoring in economics, it couldn’t hurt to take accounting. If she’s studying history or government, she could learn a foreign language. And if she insists on studying something as precarious as journalism, she should minor or concentrate in another subject -- such as business, health or computer skills.

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Janet Bodnar

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.