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Staci

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Not long ago I read an article that made me cringe: A graduate student at California State University, Northridge  decided to put her tuition on a credit card.

On her credit card? With all the other options out there? [Gasp.]

Although Jennifer didn't put her tuition on her credit card, she did charge some of her living expenses, which left her in a bit of a bind. Here's the final part of her story.

Mistake #3. Living on Credit — Not Taking out Enough Money in Loans to Cover Living Expenses

When I went away to college, my mother made a deal with me. She would give me an allowance of $200 every two weeks for living expenses (basically all she could afford). She also got me a credit card. Six years later, we still have the same deal and the same credit card.

When I took out loans, I only borrowed enough money to cover tuition costs and my rent. As it turns out, that $200 every two weeks hasn't been enough to live on, and I now have a standing balance on my credit card that I can't pay off.. Very recently a wise financial advisor pointed out to me that the nearly 18% interest rate that I pay on my credit card balance exceeds the interest rate of my student loans. Neither my mother nor I thought that it might be a good idea to budget living expenses into my student loans even though she's encouraged me to keep putting the larger, unusual purchases on my credit card.

Now that we've learned out lesson, my credit card will be paid off this fall before I start my new grad program. I've taken out extra money for my living expenses and I'm going to try something new once I'm established at school: My credit card is going in the pencil box that I bury in the bottom of my desk drawer, and I plan to withdraw a budgeted amount of cash every week.  The objective will be to live “cash to mouth,” or to make the cash last the whole week, without running out — groceries, coffee, everything. Any extra cash will go into a reward fund that I will utilize at graduation, one year from this September.

While the economy is increasingly digital, and more merchants can handle small $2.00 coffee transactions digitally, stick to cash because it's tangible. It's easier to see how the coffee adds up when you're making change and not just handing over a thin slab of plastic.

How many times have I heard that little gem of wisdom before? Lots. But there's no teacher like experience.

Jennifer's right — there's no teacher like experience. But perhaps the mistakes she made (or almost made) can help you avoid some financial pitfalls of your own.

Want to tell your student loan story? Have any wisdom to share about your own financial experiences? Send us an email — we'd love to hear from you!

Staci

Generally, Wells Fargo recommends that students exhaust all of their "free money" (such as grants and scholarships) first, then borrow federal student loans, and if they need additional funds, consider private student loans .

Graduate student Jennifer weighs the pros and cons of that borrowing strategy in her next segment.

Mistake #2: Not Considering a Private Loan over a Federal PLUS Loan for Graduate Students

When taking out my loan for grad school, I decided that I had better do my research this time. As a grad student, I now qualify for federally subsidized loans. Stafford loans only go so far, and to finance the shortfall, my options are either a Federal PLUS Loan for graduate students or a private loan. A Federal PLUS Loan for graduate students has a fixed interest rate, so of course, this is the best option. But is it really?

The terms for the two loans differ: PLUS loans have a ten-year repayment term, which can be extended with broad deferment options (including one that covers insufficient salary), and a fixed government rate of 8.5%. Private loans have a longer repayment term — up to 25 years depending upon the lender — and relatively narrower deferment options. The interest rate on private loans is based on the Prime Rate  (which is the federal funds rate plus 300 basis points, or 3%), plus a margin (one or more percentage points) based on your credit history.

Now, here's the kicker: for a private loan, the Prime Rate, plus a percentage point or two, may yield an interest rate lower than the Federal PLUS Loan if you have a good credit history. However, choosing a private loan is a gamble. The economy is currently in pretty bad shape, and the Fed has been keeping interest rates low, but inflation is also a risk — it may lead to the Fed raising interest rates in the future. The Prime Rate has ranged from 4 to 9.5% since 2000 and currently sits at 5%. Banks calculate the applicable Prime Rate differently. For example, banks can use the monthly average, yearly average, or the rate on the final day of each month. If you're going to go with the private loan, make certain that you know how your lender will calculate the interest rate.

A private loan may be the way to go if your career path is more certain and you have a good idea of what your salary will be upon graduation — i.e., you don't actually need the longer repayment term, and you can repay the loan sooner before economic conditions change too drastically and take advantage of a relatively certain lower rate of interest. But again, this is a gamble. It might be smarter to go with a Federal PLUS loan if you tend to procrastinate or think that you'll need to utilize the relatively broader repayment deferment options.

Ultimately, it comes down to this: You have to do what's best for your own financial situation, and what might work for one student might be completely wrong for another. So do as Jennifer did — if you need to take out a student loan, weigh your options, weigh your individual tolerance for risk, and after educating yourself, borrow accordingly.

We'll have Jennifer's last piece of advice on Thursday.

Staci

As we commemorate the second anniversary of the Student LoanDown — how can it be two years already? — I'm reminded of why we started blogging in the first place: To have a conversation about education financing.

Although we bloggers tell you about our experiences, it's really your experiences that resonate loudly and clearly with this community. And recently we were fortunate enough to get some great real-life experience from Jennifer, an American student about to begin graduate work at the the School of Oriental and African Studies  in London.

So for the next couple of days, I thought I'd share Jennifer's advice with all of you. It's a slightly different perspective from ours, which is what blogging's all about.

My parents were fantastic financial planners. They saved enough money to almost entirely pay for my entire undergraduate education, which was fortunate because they also made too much money for me to qualify for federal loans.

I did have to take out a couple of private education loans as an undergraduate for the summer course I took in Geneva and the month I spent doing volunteer work in Brazil. When I began to apply for loans, having already taken Intro to Microeconomics , I figured that the student loan market was probably homogenous because every bank offers student loans. How different can they be?

Plenty different, let me tell you. Thus, I would like to offer "The Three Mistakes I Made (or Almost Made) Financing My Education."

Mistake #1: Not Reading the Fine Print

Know the details of your loan. Before you sign the loan, read the fine print. I'll bet you're thinking, "Oh brilliant advice, everyone knows that you're supposed to read over the details of a loan before you sign it!" But seriously, how many people actually read the fine print, those tiny little details in seven-point font that appear in a new PDF window and go on for about six pages?

I didn't. Brilliant financial planner that I am, I was usually applying for loans after classes started, in an hour between classes, after I'd received the notice from Student Financial Services telling me that I owed the school money. I chose my lender based upon the lender my roommate at the time was using. I hate filling out loan applications because it feels as though the amount is always large and relatively abstract — while I theoretically know the value of $49,000 (the cost of 1 Masters of Science degree , also a year's salary, the cost of a luxury car, etc.), the reality of that large an amount of money remains relatively unfathomable. The possibility that I will ever earn a salary high enough to pay it back seems unreal. Even the meager $10,000s I needed sporadically as an undergrad felt relatively daunting and thus, I avoided loan applications until they became absolutely pressing.

The reality of the situation is that taking out loans requires comparative research. The first undergraduate loan I took out required repayment upon completion of my BA, regardless of whether or not I was continuing my education at the graduate level — something that I was in no position to do.

Select your private loan company carefully. Some loans allow repayment to begin before graduation, some charge an "origination fee," others do neither. It is a good idea to check the student loan options at the bank you keep a checking account with, as some banks offer post-graduation interest rate reductions for current customers. Consider opening a checking account with a bank just for the interest rate reduction; a lot of students relocate to a new city and have to open a checking account anyway, so check out which banks operate where you go to school. Many banks offer checking account applications over the internet, so you can apply before you leave home with plenty of time to apply for an education loan.

For a helpful guide to the different types of loans and their terms, check out Mapping Your Future , and for extra financial planning fun, click on the "play Show Me the Future" link on the left side of the screen.

Next week we'll be back with Parts 2 and 3 of Jennifer's financial aid life lessons. Stay tuned!

Barbara

Just like many U.S. students choose to spend time studying abroad, many international students choose to study in the United States. Here are two great resources for students considering traveling to the U.S. to further their education:

• educationUSA — advising centers from the U.S. Department of State

• eduPASS — a guide to studying in the U.S. including travel and customs

I recently answered an Ask the Expert question about student loan availability for international students. I wanted to share that information with the rest of the Student LownDown readers. Here's the scoop…

International or not, students should always apply for federal aid first. However, most foreign citizens aren't eligible for student aid from the U.S. federal government. There are some cases where non-citizens may be eligible for financial aid. Students should check out this online guide to federal student aid for international students to see if they qualify.

After federal aid, international students could consider private student loans. Many lenders will ask that international students who apply have a cosigner who is a U.S. citizen. Cosigners assume equal liability for the loan, so this is not a responsibility to be taken lightly.

For our international student readers, what has been your experience with American financial aid? How does the process work in your own countries?