If you’re considering taking out a student loan to pay for your college education, you’re far from alone. Current statistics tell us that 43.6 million U.S. residents carry over $1.774 trillion in student loan debt, with an average amount of student loan debt of slightly over $37,717.  

And if you’re tying yourself in knots trying to decide whether to undertake that much debt for a college degree, well, you’re not alone there, either. Substantial amounts of student loan debt can wreak havoc on fragile finances, especially when the economy is in a state of upheaval and you’re new to your career field. 

Moreover, not everyone is able to make regular student loan payments as called for in their loan servicing documents. For whatever reason—illness, disability, an inability to secure and hang on to a job with a high enough salary to cover those monthly loan payments—you could wind up not being able to make your minimum monthly payments, and there can be serious consequences for that. 

Student loans are often sold to the general public as an investment in your education and in your future. Assuming the truth of that statement, then the responsible thing for any potential lender to do is ask some hard-hitting questions, just like you would for any other investment. What kind of return on that investment can you expect? And what’s the risk of carrying that much debt? 

Here are the critical things to consider before taking out a student loan. 

💰 We often think taking out a student loan is the only way to pay for college, but that isn’t always the case. Read more about college without debt.

Your Actual Need for a Student Loan

Before taking out a student loan or comparing terms from private lenders, figure out if you actually need a loan in the first place. 

First, estimate the costs of your chosen school. Include living expenses, books, supplies, equipment, and activity fees. You’ll also need to have funds sufficient to cover monthly bills that you’d have to pay no matter where you study, such as mobile phone bills, car maintenance, or other transportation expenses. 

Compare the estimated annual total with your non-loan-based financial aid and other resources, including funds your parents or other family members might have paid into over the years and any savings you’ve accumulated. The gap between those two numbers—estimated expenses and non-loan funds—is what you’ll have to borrow. 

If that sum is daunting to you, pay attention to that intuition and consider it a warning bell. Carrying substantial debt right after graduation can be a heavy financial burden. But before you decide either way, first evaluate your school choice. Is there a less expensive institution that can still help you meet your educational and career goals? If so, consider whether you’d be better off there, financially but also mentally and practically. 

👩‍🎓 Many college students underestimate what they’ll need to spend. Read more about the hidden costs of college.

Consult With Your Financial Aid Advisor 

The greatest asset you have in evaluating your student loan needs may be ready to help you from the moment you’re accepted, possibly even earlier. 

Your college’s financial aid office has a single mission: to help you understand your options for funding your college education and to help you apply for and get the funds you need. A financial aid advisor has the experience and expertise necessary to help guide you through the entire financial aid process. 

When should you first talk to your advisor? The earlier you make contact, the better, as this will help you take advantage of non-loan funding sources such as grants and scholarships. Maximizing the amount of time you have to apply for and secure these funding opportunities will help minimize the amount of any student loan you eventually require. And the lower your loan amount, the better for you when your repayment obligations begin after graduation. 

Make an appointment with your adviser, and then prepare a list of questions. Let your advisor know your goal is to minimize the loan funds you’ll need to pay for your education. Explore all the possible paths to that goal with the adviser. Use your meeting notes to create a checklist of deadlines with advance reminders so you won’t miss out on a potential source of funding. 

💸 Your choice of college can have a significant impact on your costs and the amount of debt you take on. Read more about the impact of where you go to college.

Know About the Different Types of Student Loans

Students can take out loans to cover their educational expenses from several different kinds of lenders. At the broadest level, you can choose between federal and private loans: 

  • Federal loans originate with the federal government as the lender. 
  • Private loans are issued by non-governmental entities, such as banks, financial institutions, and other private organizations. 

There are also three major types of direct federal student loans you can use to pay for undergraduate or graduate-level educational expenses:

  • Direct Subsidized Loan: Available to eligible students at the undergraduate level. Applicants must show financial need to qualify. These loans do not accumulate interest while you’re enrolled in school because the federal government pays the interest during that time. 
  • Direct Unsubsidized Loan: Eligible students at the undergraduate, graduate, and professional-degree levels may apply for an unsubsidized loan and do not have to show financial need. Unsubsidized loans begin to accrue interest while you’re still in school. 
  • Direct PLUS Loan: Graduate and professional-degree students may apply for the PLUS loan, as may parents of undergraduate students who are listed as dependents on their parents’ tax returns. This loan is designed to help eligible applicants pay for educational expenses that aren’t covered by the student’s other financial aid sources. Applicants are required to submit to a credit check and may have to meet additional criteria if that credit check reveals negative items. Borrowers do not have to show financial need. 

In addition, you can use a Direct Consolidation Loan to consolidate, or combine, all of your existing federal student loans into one loan with an interest rate based on the average of the rates of all your loans. This simplifies repayment and administration and might even reduce your costs. 

Understand The Pros and Cons of Available Loan Types

The terms and conditions of private and federal loans can differ widely. It’s important to make sure you read the fine print for any loan you apply for before you sign those documents and return them. 

👉 For example, federal loans don’t require repayment to begin until after you graduate, leave school for any other reason, or drop to below half-time status. On the other hand, private lenders may require borrowers to begin repayment while they’re still in school, although some may permit borrowers to defer repayment until after graduation. 

Moreover, interest rates for federal student loans are fixed and can be lower than the rates for private loans, which can be either fixed or variable. It might not seem like a huge difference when you’re just beginning to prepare for college life, but even a slight variation in interest rates can cause your monthly payments to change significantly. 

Finally, federal student loans are eligible for federal consolidation loans as well as potential loan forgiveness in exchange for public service commitments. Federal loans also offer several types of repayment programs, including a plan that ties the amount of your repayment obligation to your income. Private lenders may or may not offer similar programs, so be sure to ask. These features may not apply to your situation, but they can provide attractive benefits for some students. 

Explore Federal Loan Options First 

While there are circumstances where private loans are a great solution, it’s generally better for applicants to pursue federal loans first. The interest rates tend to be a bit lower, and you may benefit from income-driven repayment options and public service forgiveness features that private loans typically don’t offer across the board. 

To maximize the funds you can qualify to borrow, it’s important to apply as soon as you can. File early for federal loans by completing and submitting your Free Application for Federal Student Aid (FAFSA) form as soon as possible. Check the deadlines for FAFSA submission and also verify with your chosen college what deadlines it has adopted for FAFSA, which can vary from the federal deadline. 

Shop Around for a Private Loan 

If federal loans aren’t going to get you to your financial aid goals, you may need to consider taking out a student loan from a private lender. Examine your potential lenders and their offers on the basis of these criteria:

  • Interest rates: Private lenders can charge a wide range of rates, which can significantly alter your repayment obligations.
  • Variable versus fixed-rate structure: Fixed-rate loans are more predictable. If interest rates increase, your variable-rate loan’s interest will also rise and you could wind up with a higher monthly repayment amount. 
  • Repayment terms: How soon will you need to begin repaying your private loan? Some lenders require full payments or interest-only payments while the borrower is still enrolled in school, while others require minimum monthly payments and still others defer payments until after graduation. 
  • Length of repayment: Also how long will you have to pay back your loans? For example, many lenders offer a choice of terms, from eight to fifteen years. Shorter terms mean your monthly payments will be higher but you’ll pay the loan off more quickly. 
  • Customer service and reputation: You’ll be dealing with your lender and loan servicing company for a long time, so take the time to research their reputation for dealing with borrowers and complaints. You can search for independent reviews online and also check the database of complaints maintained by the Consumer Financial Protection Bureau (CFPB), a federal agency. 
  • Cosigner requirements: Most lenders will require you to have a cosigner for your student loan application unless you already have a stable income and good credit. If you aren’t able to repay the loan as the terms require, your co-signer would then be legally obligated to make those payments. 

How important each of these factors is to you depends on your circumstances, of course. Don’t forget to also take into consideration your own needs and preferences.

Understand Your Repayment Obligations 

First, it’s important to clarify when your repayment obligation begins. Some private loans may require you to start paying your loan back even before you graduate, while federal loan repayment doesn’t typically kick in until you graduate with your degree or leave school for some other reason, or drop below half-time status at your institution. 

Next, estimate how much you’ll have to pay each month when repayment does kick in. Remember that you’ll end up owing substantially more than you borrow, thanks to accruing interest. 

Keep an eye on the funds you’re borrowing. Estimate interest rates for your loans given current rates. Then use online calculators to estimate your future repayment amount. 

Make sure the amount you’ll have to repay monthly is practical given your anticipated income after graduation. You can research average starting salaries in your chosen profession or field to get an idea now of what you might make in your first post-graduation job. 

Understand the Consequences of Failing to Pay

As we’ve all learned first-hand over the last few years, the unexpected can and does happen, often to a disruptive effect. What happens if you can’t graduate and have to drop out of school? Repayment on your loans will then kick in, and you’ll be obligated to make payments, just as if you’d graduated and found that better job you’re anticipating. 

You may also not be able to find a job with a salary as high as you’re anticipating. If that happens, you may likely struggle to meet the full loan repayment amount each month. 

You may have one or more options for relief available to you in either of these situations. 

  • Income-based repayment ties the amount you have to pay each month to how much you’re earning. 
  • Deferment is a program that relieves your repayment obligation for up to three years. 
  • Forbearance postpones your payments for up to one year, after which you can ask for an extension of the forbearance period. 

These programs are typically associated with federal loans but private lenders may also have options available for borrowers struggling to pay. Find out in advance what policies your potential lenders offer. 

👉 We asked an expert panel for financial tips for college students. Here’s what they said.

Consider Whether a Loan is Worth the Debt You’ll Carry

Finally, now that you know the true total cost of borrowing to finance your college education and have collected all the relevant data, consider whether taking out a student loan is worth it. 

Substantial student loan debt can be a heavy burden, even when everything’s going well. When you’re experiencing financial distress—unemployment or underemployment, for example, or unanticipated medical crises—student loan obligations can be downright catastrophic. 

You may be able to qualify for relief or assistance from your lender, especially with federal loans, but the psychological burden of heavy debt should also be weighed. That much debt—any kind of debt—can limit your choices and options. For example, you might feel forced to take a job you don’t want just to pay those obligations, or to give up living in your preferred city in order to reduce living costs. 

Taking out a student loan can help you reach your goals and make your dreams a reality, but it can also create a financial obstacle to those dreams and goals. Make sure you know what you’re getting into and that you’re getting the best deal you can before you agree to anything. 

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