Recently, I found myself helping a friend better understand the student loans process and all the ins and outs of federal vs private loans. It has been over a decade since I first learned anything about student loans, but the schools and lenders still make it pretty confusing and the whole process can be a stressful mess.
Questions You Should Ask (Yourself, Your Schools, Your Lenders)
Keep in mind that the cost of your education is not limited to tuition, books, and lab fees. You’ll need to account for housing, food, and other living expenses if you’re not able to cover those as well. If you are required to live on campus your first year and buy a meal plan, this takes out some of the guesswork of your living expenses.
- How much do you REALLY need for tuition/books/housing/meals etc.?
- How much are you/your family contributing to college? Will you receive some sort of living allowance?
- Have you applied/received scholarships already that will reduce your remaining expenses?
- What is the ROI?
- Seriously think about your future – will you be able to find a job making enough to pay back your student loans in your desired field? This isn’t only a long term consideration. Depending on the type of repayment plan, you may owe quite a bit starting with your first payment as opposed to income-based repayment plans.
- What are the interest rates of the loans you are considering? Will you have to pay interest while you are enrolled?
- Is there a grace period after graduation, before your first payment is due?
- Is there a penalty for paying your loan off early?
- What are the requirements for the borrower and enrollment (do you start repayment if you are not a full-time student?)
- Have you run an estimate on your payments after graduation?
*This is by no means a comprehensive list, but just some food for thought when considering student loans.
Become VERY familiar with your chosen institutions Financial Aid Office. Save their number in your phone. You want them on your side when you are trying to understand your financial aid options, scholarship opportunities, grant options, etc. They are your resource before you are in school, while you are there, and after you graduate. Bonus, they will also provide your financial aid exit counseling (the kick into the real world of loan repayment.) Don’t let that meeting be a surprise when you see how much money you have borrowed for your education. My eyes did backflips and I felt sure they added a few zeroes along the way.
First and foremost, if you need any kind of financial aid for school you should start by filling out a FAFSA. This is the Free Application for Federal Student Aid. This is how you provide the financial information which becomes the basis for determining your financial aid eligibility. Plan to fill this out as soon as it is available for your upcoming school year. In the event you have to provide additional documentation, make a mistake on your form, or there are timing delays, you want to have this done as early as possible. The earlier you fill this form out, the better. Meanwhile, you can apply for scholarships, compare aid packages from your prospective schools, and better understand how much money you will need for your education.
Federal vs. Private Loans
As mentioned above, the FASFA applies to federal student loans. However, in some cases, federal aid may not be enough to cover your remaining education expenses. Private student loans are another option to close the gap.
Federal student loans are, you guessed it, through the U.S. Department of Education. If you qualify for federal aid, you will receive that information after you have successfully filed your FASFA and be provided with the breakdown of the aid you are eligible to receive from your school. You can elect to accept this aid, but keep in mind there is a maximum amount per year and it may not cover your remaining need. Federal student loans may have lower interest rates than private loans, include a grace period (6 months) post-graduation before payments begin, and often do not require a cosigner.
Private student loans are acquired through banks or other private lenders and are a whole different ball game from federal loans. These loans may be higher interest rates than federal student loans in some scenarios. Some things to consider when applying for a private loan: credit score, a possible cosigner, interest rates, payback timing, and how the loan is handled in the event of bankruptcy or death of the borrower. Spoiler alert: private loans are much harder (if not impossible) to have forgiven in the event of either. And remember that cosigner? They aren’t off the hook.
Paying Back Your Loans
So you’ve taken out the loans to cover your education. Eventually, you do have to pay them back. Hopefully, you have been fortunate to secure loans that have a grace period after you graduate. This gives you time to find a job, housing, get settled in your post-college path, and prepare to start paying off your student loans. Several months before I graduated, I started a budget to estimate my bills, including my loans, and gain a better understanding of how much I had to make to afford my obligations. You may not have the exact amount of your payments but call your lenders, verify your loan amounts and interest rates, and meet with your financial aid office to answer any questions you may have before you graduate and get your first bill. Don’t worry…your lender will send you PLENTY of mail before your first payment. You think someone is nice and sending you lots of snail mail, but it’s just more reminders that your student loans are about to be due. Below are just a few things to consider regarding loan repayment.
- Find out if you can use auto pay – sometimes this can even translate to a reduction in interest.
- Pay attention to your mail/email from your lenders. Just like mortgages, private loans get sold all the time.
- Ask about having a cosigner removed – what are the requirements?
- If you’re motivated by debt repayment plans, consider a snowball method, multiple payments per month, etc.
- Look into your options for loan consolidation.
Student loans may not be the most exciting topic in the world, but for a lot of us, they were or are necessary to bridge the funding gap and attend college. Please send me any additional questions!
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