Make Sense of Your Loans
Wise Borrowing – Make Cents of Your Loans
Once you have determined where you are going to college and how much it will cost, you might be asking yourself, “Now, how do I bridge the gap?” This is a good time to start looking into your loan options. Keep in mind that loans are intended to help pay educational costs and should not be used on extra out-of-pocket expenses, such as pizza and shopping. Loans are required to be paid back and, in many cases, with interest. Interest is the cost you pay for taking out the loan and this is charged on top of your original loan amount.
Tips to Set Yourself up for Success
When looking at loan choices, think about the big picture. Consider what your total borrowing may be after graduation. Consider what you might want to major in during college and how much you could be making at your first job. As a rule of thumb, your monthly student loan payment should not exceed more than 10-15 percent of your total monthly income after you graduate. Create a budget to make sure your earnings will cover all of your living expenses plus your loan payments and still leave you with some income to save.
Federal Direct Student Loans are offered to you after successfully completing the Free Application of Federal Student Aid (FAFSA) process. The lender is the Department of Education through the federal government. Your financial need is determined upon review of your FAFSA in relation to your cost of attendance.
It’s important to know the difference between the various loans that may be included in your Notification of Award. For instance, if you are offered a subsidized loan, you won’t have to worry about interest accruing because the government will pay the interest for you while you are attending school. An unsubsidized loan, on the other hand, will accumulate interest while you are in school. The third option for a federal loan is a Parent PLUS loan. This is a loan taken out in your parent’s name to help you pay for school. It does accumulate interest and has fees associated with the loan, so you should contact your school directly for more information on this loan to ensure this is the right choice for your family.
Have you ever taken out a loan and noticed that the amount disbursed is less than the amount you actually borrowed? This situation would likely be from loan fees. Loan fees are costs you have to pay to originate or service your loan. These are charges in addition to the interest you will already be paying on the loan. You will be required to pay back the full amount borrowed, not just the amount disbursed. Keep your eyes open for loan fees when looking into different types of loans, and always ask your lender if there are fees associated with taking out a specific kind of loan.
A term, when talking about loans, is the length of time you have to repay your loan to the lender. Most federal loans have a 10-year term with a minimum monthly payment around $50, but it can vary depending upon the repayment plan that you select. Talk to your lender or servicer about the length of the loan term and be sure to ask if there are any prepayment penalties associated with the loan. A prepayment penalty or additional fee may occur when paying a loan off early.
Private education loans are borrowed through a private lender or bank. Private education loans typically don’t have all the benefits of a federal loan. It’s best to exhaust your federal loans first and then look into private loans, if necessary. Take the time to research your private lender options because it is a relationship that you will have for many years. The standard repayment term for most private lenders is a minimum of 10 years. Due to this it’s in your best interest to take the time now to ensure the lender you choose will meet your needs. Here are some tips on what to include in your research:
- What is the interest rate? Is this rate fixed or variable? If variable, how often can it change?
- Are there any fees associated with taking out this loan?
- Is there a limit on the loan amount you can borrow?
- Is a co-signer required?
- Can the co-signer ever be released from the loan? If so, after how many on-time payments?
- What is the loan term? How many years do you have to pay this loan back?
- What repayment options are available to lower my payment?
Need help starting your private lender research? Reference our private lender list which allows you to compare loan options side by side. You aren’t required to borrow from these lenders as you can choose any lender that offers a private education loan. This list is a great place to begin your research!
It’s important to keep track of your student loan borrowing throughout your college career. The National Student Loan Data System (NSLDS) is a great tool to help track your federal loans and keep you in the loop with your loan servicer, your current interest rates and how much you’ve borrowed. Your private education loans are not listed on NSLDS. Contact your loan servicer directly with any questions.