Millions of high school graduates will finalize the biggest financial decision of their young lives Monday, if they haven't done so already: where to attend college.
The choice will carry a hefty price for many students and their families. For the 2016-2017 academic year, the average all-in cost of one year at a public university was $20,090 and more than double that — $45,370 — at a private college, according to the College Board.
People have turned to student loans to pay for college costs that are rising faster than the overall rate of inflation. Last year, 42.4 million Americans owed $1.3 trillion in federal student loans and more than 4.2 million borrowers were in default.
You and your children can avoid that debt trap. Here is a four-step strategy to figure out how the choice you make on College Decision Day will affect your student debt load.
Know exactly what your school will cost
Most colleges have a net price calculator on their websites to help students and the parents determine what their top college will cost after scholarships and grants. These tools require students and parents to answer detailed question about their finances, so you may need your tax returns and a snapshot of your bank and investing accounts to answer all the questions.
Several other online calculators can give you a rough estimate of the costs. If you plan on going to a private school, MyinTuition will provide a ballpark figure by answering just eight question in about three minutes.
Many students underestimate the cost of college. Only 41 percent of high school seniors expect to borrow to finance their degree, according to a survey by student loan servicer Navient and education technology EverFi. However, 61 percent of students who go on to finish school take out loans, according to the College Board.
Pick up as much free money as possible
Students and parents have received their financial aid offers, but don't take them at face value.
Understand the difference between scholarships and grants, which don't have to be repaid, and student loans, which do. When your kid receives a scholarship, ask about the school's "displacement" policy. It's a sneaky way of reducing the value of a scholarship by including it as part of your income and giving you smaller financial aid packages.
Consider what happens to grants and scholarships after freshman year. The aid offer's addendum details whether a scholarship can be renewed. College Navigator, which is run by the Department of Education, can give you a sense of the average scholarship rewards for all undergraduates.
Determine your best options to fill the gap
What's left after scholarships and grants must be paid out from savings, income or student loans.
For most borrowers, federal student loans will be the most affordable option for undergraduate tuition. Direct federal loans currently have an interest rate of 3.76 percent. However, these loans have limits on how much you can borrow each academic year. Annual limits vary by class level in school and whether the student is a dependent on parental financial resources.
Parents also can take out PLUS loans, which currently carry an interest rate of 6.31 percent. Last year, more than 3.3 million borrowers held $74.5 billion in parent PLUS loans used to pay for their children's education, according to the U.S. Department of Education.
"Private student loans make sense for borrowers with good credit and most undergraduate loans have a co-signer."
Depending on your financial situation, consider student loans from private lenders. Keep in mind that, unlike with federal loans, these options don't offer income-based repayment plans or loan forgiveness.
"Private student loans make sense for borrowers with good credit, and most undergraduate loans have a co-signer," said Jereme Albin, senior manager at Credible.com, an online marketplace for private lenders.
Roughly 94 percent of private undergraduate student loans are made with co-signers, according to lending data company MeasureOne. Undergraduates with co-signers qualified for loans with interest rates averaging 5.37 percent on Credible's platform. Without a co-signer, rates averaged 7.46 percent, which is higher than rates charged by federal parent PLUS loans.
Estimate what you will make when you graduate
The final part of the financing decision comes down to how much you'll make after you get your degree.
College Scorecard, another website from the Department of Education, shows users the average salary for graduates after attending most colleges and universities.
Your prospective college should provide you with placement rates and average salaries for your major and program. Use that data to estimate how much of your salary after graduation will go to servicing your loans each month, said David Klein, co-founder and CEO of CommonBond, an online lender that specializes in student loans.
"If it doesn't add up, something has to change," Klein said. That means either finding a school that is a better financial fit or pursuing a career that will pay more after graduation.
Most borrowers who graduate have an affordable amount of student loan debt, meaning they can repay it in 10 years or less, said Mark Kantrowitz, vice president of strategy for college and scholarship search site Cappex.com.
To keep debt loads manageable, Kantrowitz recommends that students take out no more debt than their expected first year's salary out of college.