For many students, loans provide the financial means to bridge the gap between personal resources and the costs associated with college or graduate school. Many experts consider student loan debt to be a type of “good” debt because the education you obtain after high school often allows you to enter career fields that will help you earn a good and stable living. But loans also represent a financial obligation that should be taken seriously.
Do You Really Need a Student Loan?
Take an honest assessment of your personal resources, and if applicable, those of your parents or guardians and compare them with the cost of attending the college(s) of your choice. If there is a huge gap with no other resources, student loans may be your only option.
Likewise, if you are planning an especially demanding course of study, taking out a student loan may allow you to devote more time to studying rather than trying to hold down a part-time job as well. But make sure you are using the loans for the intended purpose, and not to enjoy other luxuries like a designer wardrobe or an expensive trip for spring break.
Are You a Dependent or Independent Student?
Your status as an independent or dependent student will have a profound effect on the types of financial aid – including student loans – for which you qualify. If you can be claimed as a dependent on a parent’s or guardian’s income tax return, your financial aid package will be calculated based on that income in addition to your personal resources.
By contrast, if you are married, over age 24 or otherwise qualify for independent student status, your financial aid package will be based on your personal resources alone.
How Much Should You Borrow?
Despite the fact that student loan debt is considered to be “good” debt, you should minimize the amount that you borrow. Don’t skimp to the point that you’re skipping meals or unable to ever participate in activities outside of class, but don’t over borrow either.
Instead, determine what you will need to cover necessary expenses such as tuition, room and board and a reasonable budget for extracurricular activities and compare that amount with what you can reasonably count on from grants, scholarships and work during the summer or part-time during the school year. The difference between what you have and what you need is how much you should borrow.
What Type(s) of Loan(s) Should You Take?
Does your college or university issue loans? Can you qualify for a government loan from the Perkins or Stafford loan programs? Will your parents borrow money on your behalf? Will you or your parents apply for private loans?
In most cases, government loans represent your best bet. There are no credit checks and repayment schedules are generally more flexible than those for institutional or private loans.
Your next best option is most likely a loan from your college or university. It all depends on the loan terms and how much you are actually going to need to borrow.
Make sure you evaluate all of your options before deciding on a loan, and be sure to discuss your plans with your parents or anyone else who may need to be informed of your decision.
Are There Alternatives to Obtain the Money You Need?
If you have determined that your available resources will fall significantly short of what you will need to cover the costs of college or graduate school, there may be another option besides taking out a student loan.
Have you completed a Federal Application Form for Student Aid (FAFSA)? Many schools will require you to submit a FAFSA for yourself and your parents before you can obtain any financial aid, including loans. By submitting this form you may find that you qualify for grants, work-study assistance or other alternatives to reduce the amount that you borrow.
You should also consider working part-time during the school year and full-time during the summer to reduce or eliminate your need for loans.
What Is the Application Process?
Many schools have deadlines which you must meet to qualify for student loans and other types of financial aid. In addition to the FAFSA mentioned above, you may also need to fill out certain financial applications for your particular educational institution.
You will need to check with your school(s) of interest to find out what their specific requirements and deadlines are, but you should begin collecting everything you will need as early as possible. Start gathering the needed documentation such as income tax returns, income verification, etc, to make the process of applying for a loan as quick and efficient as possible.
Can You Pass a Credit Check?
Government Perkins or Stafford loans do not require a credit check. But if you or your parents apply for student loans through a bank or other private financial institution, your credit profile will figure prominently in whether or not you will qualify.
If you know you will be applying for private loans, do what you can now to clean up your credit so that when it comes time to apply for the loan you will have a better chance of getting approved. If your credit is marginal or poor, you may need a co-signer who is creditworthy to obtain a private loan.
Are There Grace Periods?
Student loans are just that – loans. You must eventually pay the money back. Government loans and many institutional and private loans have grace periods during which no payments are due even after you complete your educational program.
But what if you must interrupt your studies for some reason? Again, government loans usually allow grace periods for students who temporarily suspend their educational programs, but many private loans will require you to begin repayment immediately.
Here’s an important read: Grieving? You May Have to Pay off Your Private Student Loan
Will You Make Enough to Pay the Loan Back?
One of the tough questions you must ask is whether you will be able to afford student loan payments after you leave school. If you’re studying finance and land a six-figure job on Wall Street after graduation, you will probably be able to afford repaying your loan with ease. But if you wind up taking a job as a barista in a coffee shop, student loan payments may represent a huge chunk of your income.
On the other hand, taking a job as a teacher in certain regions may allow you to cancel a significant portion of your loan obligation. It pays to investigate your options before taking out a student loan.
What Happens If You Can’t or Don’t Pay the Loan Back?
Despite your best efforts, you may simply be unable to repay your student loan. You may be unemployed or suffer a serious illness. Fortunately, government loans allow students to qualify for deferment or forbearance to temporarily suspend the repayment process.
You may want to read “This Is What Happens If You Don’t Pay Your Student Loans (And Yes: It’s Very, Very Bad)” before deciding to not pay back your student loans.
Private lenders may be more stringent about granting forbearance. If you cannot obtain a deferment or forbearance, your loan may go into default status, which may subject you to collection attempts including wage garnishment.
Government loans can be re-consolidated to remove the default status, but private loans are rarely eligible for re-consolidation. In a worst-case scenario, government and institutional loans that you have taken on your own are nearly always discharged when you die.
While attending a college or university may be the key to your dream job in the future, it is always important to be realistic about the steps it will take to get you there. This includes thinking long and hard about any student loans you may need to take out in order to accomplish your educational goals.
Remember that there is usually more than one way to fund your dream becoming a reality. Be aware of all your options and take your time when making these decisions. After all, they will be with you long into the future even after you graduate from college.