With tuition costs at an all-time high, getting access to higher education in the U.S. has never been more expensive. For most students, paying for the full cost of tuition, books, and housing is unrealistic without receiving some form of financial aid.
Through federal loans, scholarships, and grants, students have no shortage of options to help pay for these rising tuition costs. But how do you know what type of loan to get? Should you consider loans from a private lender? Or should you stick with federally subsidized loans?
5 Things You Should Know Before Borrowing Money for School
Here is a list of several important factors to take into consideration when taking out a student loan. Keep these points in mind when you’re applying for student loans and when you’re making your final decision on which loans to accept.
1. Know How Much You Need to Borrow
It is incredibly important not to borrow any more money than you need to cover tuition and other basic expenses like books and housing.
Student loans are designed to help students live modest lives while focusing on their studies. Taking out too much money in financial aid to live a more expensive lifestyle is not prudent.
Student loans need to be paid back, so using the money on frivolous spending is not a good idea because the interest charged on these loans can add up over time.
It is recommended to try to keep your payments as low as 10 percent of your monthly income. This will allow you to reasonably pay back the loan without having to pour all your income into a monthly payment.
With this in mind, it is critical that prospective students plan ahead and only borrow the minimum amount that will cover the basic expenses of getting a higher education.
While it is tempting to over-borrow to access a larger amount of cash, it could come back to haunt you later down the road. Only borrow what you need to avoid this financially damaging scenario.
The last thing you want is to get yourself into a situation where all of your future earnings are going toward paying a high student loan bill that could have been avoided in the first place by taking out a smaller loan.
2. Choose Federal Loans Over Private Loans
When seeking financial aid in the form of loans, you should always opt for federal financial aid. This is because government loans will carry a lower interest rate compared to loans issued by private lending institutions.
With that in mind, you should always begin by applying for a federal student loan through the Free Application for Federal Student Aid, also known as the FAFSA.
Submitting a FAFSA application is the only way to attain federal student loan aid, so it is important to get that taken care of as soon as possible. When looking for a federal loan, it is important to note that there are two types of federal loans, subsidized and unsubsidized.
A subsidized federal loan will not accrue interest while you’re attending college, whereas an unsubsidized loan will. With that said, a subsidized federal student loan is the ideal option to help you pay less interest over time.
One other important thing to know is that federal loans are much easier to get since they do not require the borrower to have a good credit history. Repayment plans can also be adjusted depending on your income. As mentioned earlier, student loans usually carry lower interest rates than private loans.
The current interest rate on a direct subsidized or unsubsidized loan is 3.73%. This is fairly low if you consider that most private loans will carry over 10% in interest. With that said, it is wise to only obtain a private loan after you’ve received as many federal loans as possible. And that loan should be for a small amount if any at all.
When to Consider Getting a Private Loan
The only reason you should consider getting a private loan is if the federal loans available to you are not enough to cover basic expenses associated with college.
If your federal loan covers the full cost of tuition and nothing else, you might want to look into getting a private loan, but it should only be for a small amount to cover basic living expenses while you’re in school.
When looking into private lending options, it is important to shop for different lenders to see who can offer you the most competitive interest rate. Getting a private loan with an interest rate under 10% would be ideal and is something you should strive for if you decide to go the private lending route.
3. Your School Can Help With Financial Aid
When seeking a student loan, you should know that the school you plan on attending is an excellent resource for information. If you have any specific questions about the process or any individual loan, you should contact the financial aid office at the university or college you wish to attend.
Not only will they help you with any questions you might have, but after you’ve been approved for the loan, the financial aid office usually takes care of everything from there.
They will collect the money from the loan and apply it directly to your tuition and student account. Any excess money left over will then be distributed to you as necessary. Knowing that the financial aid office is there to assist students with the process can give you some peace of mind in the sense that you won’t have to worry about the intricacies of the loan disbursement process.
While it is still important to know the basics, you don’t need to be an expert. Having a competent financial aid office administrator can take a lot of the burden off of you and help you gain a better understanding of the loan process.
4. Loans Come with Fees and Interest
Something that is often overlooked with student loans is that there are fees and interest that need to be paid on these loans. Unfortunately, students looking to borrow money to fund their education will have to pay more money than they originally borrowed because of the interest rate charged on loans.
While the interest rate is relatively low in comparison to high-interest credit card debt, it is still nearly 4 percent for direct subsidized and unsubsidized federal loans. This needs to be taken into consideration when looking into how much you are going to borrow.
Federal Loans Vs. Private Loans
Additionally, it is important to know that federal loans have a fixed rate for fees and interest associated with the loan. This is different for private loans in which lenders will determine different rates and fees depending on the credit history of the borrower.
With all of this in mind, it cannot be emphasized enough how beneficial it is for prospective students to seek out federal student aid. By doing so, you can ensure that you will be paying a lower interest rate than from a private lender.
The last thing you want is for your education to put you in a bad financial situation in the future. Education is meant to improve your prospects in life and not the other way around.
Choosing a low interest rate federal loan can help you in that respect. With manageable interest rates under 4% on subsidized and unsubsidized loans, these are typically the safest financing option for those looking to get a higher education.
With all this in mind, it is critical to understand the fees and interest that are associated with your loan. Knowing this information can help you better plan for the future and give you a realistic idea of how much money you will need to set aside to make the monthly payment to eventually pay off your loans in full.
5. Student Loans Can Only be Used for Specific Purposes
If you think that you can take out a student loan and use the money however you please, you are mistaken. Student loans are meant to cover expenses that are directly associated with your education. This includes tuition, books, a personal computer, and student housing.
Many think that the money they get from a loan can be spent wherever. However, most of the loan is applied directly to tuition costs automatically through the financial aid office at the school you attend. Any money left over will be given to you; however, it is prudent to use that money to cover your housing expenses.
There is no need to use the money for other expenses because your primary focus should be on getting your degree. Using the money to live a more extravagant lifestyle will come back to hurt you in the end, which is why most of the money granted by the federal government for student loans will go directly to the expenses associated with higher education.
While this might come as a disappointment, it is probably for the best. Student loans are a tool to provide funding for students to get their education, not for miscellaneous personal spending.
Understanding the purpose of student loans cannot be overstated, and those looking for financial aid should be aware of the fact that these loans shouldn’t be used for anything other than educational expenses.
Having gone over some basic things you should know before getting a student loan, we hope that you have gained a better understanding of how student loans should be used as well as the considerations that need to be made before taking on a loan.
Overall, it is recommended that students looking to get into the college of their dreams only borrow what they will need to cover basic educational expenses.
Additionally, it is wise to apply for as many federal loans as possible, seeing as they are much more favorable than a private loan. This is because they come with a significantly lower interest rate than loans that can be borrowed from a private lending institution.
While the student loan process can seem intimidating at times, it doesn’t have to be. Financial aid offices at most colleges are very helpful in answering any questions you might have and will take care of most of the loan disbursement process for you automatically. This allows you the luxury of only having to worry about your studies and not the specific financial intricacies of the loan process.
Now that we’ve gone over all the important things to know before taking on a student loan, we hope you will use this information to make the most informed decision possible when obtaining financial aid.
While gaining access to loans has never been easier for a prospective student, it is still important to know the basics of the loan process. Loans will carry interest over time that will inevitably end up with you paying more than you originally borrowed.
Luckily, the interest rates on federal loans are marginal in comparison to private loans. With all of this in mind, it is safe to say that the student loan process doesn’t need to be complex, but potential borrowers need to be aware of what they’re getting into before they commit to taking on a large amount of debt.