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credit & debt

Ways to Borrow Less

Keep your debt within reason by calculating the amount you can pull together out of savings and current income.

Saving for college is a priority for parents, right? Wrong. Almost 60% of parents surveyed for AllianceBernstein Investments, a wealth-management company, said that they spent more on restaurant meals or takeout last year than they set aside for college. Almost one-third allocated more to their kids' allowance than they did to a college fund. About half spent more on vacations.

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Students are borrowing more than ever to cover the shortfall between college savings and costs. Over the past decade, the number of students with $40,000 in student loans has increased tenfold, according to the American Association of State Colleges and Universities. That burden hinders their ability to start a family, buy a house or make other major decisions.

Whether you've saved six figures or nothing at all, your student may end up taking out loans to cover expenses. To keep the debt manageable, students should try to limit their monthly payment to between 10% and 15% of their expected future income, recommends FinAid.org. A calculator on the FinAid Web site, the "Student Loan Advisor," allows students to plug in their major field of study, expected graduation date and loan interest rate, then gives them the maximum loan amount that they can safely handle based on their projected starting salary.

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Say your son plans to major in education. According to the calculator, he can anticipate a starting salary of $35,100 as a teacher. To limit his payment to 10% of his income, he could borrow about $25,500 at a 6.8% interest rate (the rate on new Stafford loans) with a ten-year repayment schedule.

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If that sounds high, consider that the average cost for a full-time student at a four-year public institution runs about $6,000 per year in tuition and fees. So a student splitting the cost with his or her parents might reasonably borrow $12,000.

If you plan to borrow on your student's behalf, keep your own debt within reason by first calculating the amount you can pull together out of savings and current income. Figure on borrowing about 125% of the difference between that number and net college costs, rounded up to the nearest $1,000, according to FinAid. For instance, if the college bill comes to $10,000 and you're short $4,000, borrow $5,000, giving yourself $1,000 to cover the cost of the loan payments.

Here's a thought: Have your kid start at a college you both can afford. Your student may be able to score a debt-free diploma by attending an in-state public university rather than a private school, or by starting at a community college -- where tuition and fees average about $2,200 a year -- and then transferring.

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