11 Things to Think About Before Getting a Student Loan
BIG Ideas:
- Before applying for a student loan, review alternate options like scholarships, grants, and work study that can help reduce the amount you have to borrow.
- Understand the differences between federal and private loans, including interest rates, repayment options, and other benefits.
- Estimating how much your payments will be after graduation can help you make informed career and financial choices.
The decision to attend college is a huge step in your life. It won’t be the first, though. Along your college journey, you’ll have to make many big decisions – from choosing the perfect school to deciding on a major to figuring out how to afford the cost of college.
Speaking of paying for school, that’s likely one of the biggest decisions you’ll make in your financial life beyond college, especially if you get student loans. That’s why before you apply for student loans, it’s important to take the following important steps:
- Explore alternative options. There are other ways to make college affordable beyond student loans, including scholarships and grants (FREE MONEY you don’t have to pay back!).
Another option is Work Study, which allows you to earn money while in school, helping reduce the amount you borrow. You could also get a job and attend school part-time to potentially take advantage of tuition reimbursement from your employer, which could save you a lot of money.
- Understand the types of student loans. There are essentially two types of student loans: federal loans (from the U.S. government) and private loans (from financial institutions and non-profits). While it is encouraged to exhaust all forms of federal aid and loans first to take advantage of valuable benefits such as income-driven repayment plans and potential loan forgiveness, private student loans may be an important tool to help you pay for college.
There are a few key differences, but in general, federal loans usually offer lower interest rates, options to defer payments, and those benefits we mentioned, like income-driven repayment plans. Private loans usually offer more flexibility and higher borrowing amounts.
When evaluating loans, look closely at interest rates, which have a big impact on your payments. Federal loans typically are fixed-rate loans while private loans can have both fixed and adjustable rates that vary by lender.
- Review how interest accrues and capitalizes. Federal loans accrue interest while you’re in school, but you aren’t obligated to make payments until after graduation. With a federal subsidized student loan, the government pays the interest while you’re in school.
In contrast, with an unsubsidized student loan, the interest will accrue and be added to the amount you borrow (also known as capitalization). You can, however, opt to pay interest while you’re in school, which will reduce your overall borrowing amount after graduation.
When it comes to private loans, there are three main repayment options: immediate repayment, where you pay both principal and interest while in school to minimize total costs; interest-only repayment, which delays principal payments until after graduation and decreases the overall amount you will owe because no interest accrued to be capitalized upon graduation; and deferred repayment, where payments start after school but lead to higher costs due to the capitalization of accrued interest. Since choosing a repayment plan can impact your future budget and long-term costs, understanding these options ensures you make an informed choice for your financial future.
- Understand repayment schedules. Another important factor in evaluating student loan options is understanding how and when you must pay back what you borrow. With federal loans, for example, you can choose from several repayment options, including standard repayment, income-driven repayment, and extended plans. Not all private loans have such options.
With income-driven repayment, for example, your monthly payments are based on your income. That gives you the benefit of paying less if you’re not earning much after graduation.
- Know the benefits available with federal and private loans. One big benefit of federal loans includes deferment/forbearance options. With deferment, you may be able to suspend loan payments if you experience a financial hardship. With forbearance, you can temporarily suspend payments, though interest will accrue.
Private loans, in contrast, are available in a variety of terms, but in general, have fewer repayment options and may require you to begin making payments immediately.
Another important thing to know: With federal loans and some private lenders, there is a grace period before you start making loan payments. This grace period is usually six months after graduation, but it isn’t available with all private lenders.
Federal loans offer another important benefit – loan forgiveness, such as Public Service Loan Forgiveness (PSLF), which cancels your student loan balance if you work for a qualified employer and make a certain number of payments.
- Figure out how much you need to borrow. You never want to borrow more than you need, which just leads to higher debt and more financial strain after graduation.
Calculate how much you need to borrow by factoring in tuition, fees, books, living expenses, and other school-related costs, such as a laptop.
- Estimate your future income and ability to repay a loan. When you’re in school, you may not be thinking about your monthly payments, however, when you graduate, those payments will become a reality.
Knowing how much your payments will be after graduation can help ensure you make career and life choices to cover your loans. You also want to understand your debt-to-income ratio after you graduate, which will impact your ability to get future loans, such as a car loan or mortgage.
- Know your credit score. Federal loans don’t require a credit check, while private loans consider your credit score. As a result, private lenders will check your credit score before approving you for a loan. If you have poor credit, you may not qualify or get the best interest rate. In such a case, you could consider applying with a co-signer.
Another thing about credit scores: how you manage your student loan (whether it’s a private or federal loan) will have a big impact on your credit for years to come. That’s why it’s critical to always make your payments on time.
- Determine who will help pay for college. Will you be paying for college on your own or with the help of family? For example, if your parents are helping, they may take out a Federal Parent PLUS Loan to pay for school. Or if you have a private loan, your parents may be willing to co-sign to help you qualify. Some private lenders may also offer a Parent Loan, which may have lower interest rates than the Federal Parent PLUS Loan.
- Read the fine print. We get it, loan disclosures may not be riveting reading. They are, however, important to help you know the fees, terms, repayment schedule, and late payment penalties before you borrow.
- Consider your long-term financial future. Again, the money you borrow for student loans won’t only impact your college life but also your financial future. So, before you decide how much to borrow, make sure you think about your long-term financial goals, such as buying a home, saving for retirement, and even starting a family.
Taking on too much student loan debt now could cause you to put those plans for later in life on hold. Always look at the big picture.
Student loans can be a smart way to pay for college. Make sure you understand the types of loans available and the impact borrowing for college will have on your goals and budget later in life. Making good financial choices now can help you get off to a great start in adulthood, which is what college is all about.
Brazos is Here to Help Make College Affordable
For more than 40 years, Brazos Higher Education has been helping make education more affordable for students. As a Texas non-profit, we offer great rates and no fees on private student loans to help fill the gap where federal loans leave off. Contact us to learn more.
