Student loans are by far one of the most common ways for college students to pay for their education.
But to help you gain a better understanding of this decision, here are 10 questions you should always ask before taking out a student loan.
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1. Do I need a student loan?
Student loans can sometimes get a bad rap. But they are by no means a bad way to pay for college. However, they can be riskier than other alternatives as your future earnings are used as collateral, meaning you’re required to pay them back with your future paychecks.
So to minimize the risk that comes with taking out a student loan, make sure you consider other options as well. For instance, find out if you’re eligible for a Federal Pell Grant. This is financial aid awarded to undergraduate students from the federal government.
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Grants are a fantastic option to students as the money doesn’t have to be paid back. If you don’t qualify for the Pell grant, you can check out this list of other grants available to students. And don’t forget to check and see what grants your state is able to offer as well!
Similarly, many foundations and private companies offer scholarships. Don’t shy away from these if you don’t feel like you have the academic achievements to receive them. There are scholarship programs available based on ethnicity, gender, writing level, and more.
Additionally, students can explore the option of working while in school. Try looking around the city or town where you’ll be going to school and see if you can find a job that will be flexible around your class schedule. If you’re having trouble finding a job that you can balance with school, check out your university’s work-study program.
2. How much do I need to borrow?
Unfortunately, many students approach student loans with the wrong question: how much can I get? But it’s important to keep in mind the more you borrow, the longer it will likely take you to pay back.
Instead of thinking about how much you can have, try carefully thinking through how much you need. This amount is going to be different for every individual student and is going to be heavily dependent on things like the costs of your tuition, books, and other school fees. Don’t forget to also factor in your cost of living such as rent, food, and other personal items you’ll need.
Make sure you take some time to carefully figure out exactly what your costs will be over your time in college, so you’re only borrowing what you really need.
3. Should I take out a federal loan or a private loan?
Once you’ve determined that you have a need for a student loan and have figured the exact amount you need, the next step is to figure out which type of student loan is right for you: federal or private.
Federal loans are given to students by the federal government for the exclusive use of paying for college. In order to be eligible for a federal loan, you must be enrolled in an accredited college. You’ll also need to complete the Free Application of Student Aid (FAFSA) form to determine how much you qualify for. There are several different types of federal student loans which you can learn about here.
Though federal loans are generally seen as the better option for most students, you may consider exploring what private loan options are available to you. It’s important to note that these loans often come with higher interest rates and sometimes have additional fees. To make this easier, there are several sites that compare the latest rates and fees of private loans in one place, making it easier for you to compare.
4. What’s my credit score?
Perhaps we should start this section off with the question: what’s a credit score? A credit score is a number looked at by banks and lenders to determine how risky it is to lend you money. The higher your credit score, the safer it is for a bank to lend you money.
The good news is that there are loans available for those with good or bad credit scores (and even for those who have no credit score at all). However, it’s important to have a good credit score if you can as it can determine some of the terms of your loan. For instance, someone with a poor credit score is likely to get a higher interest rate and stricter repayment plans.
Finding your credit score is relatively easy, such as checking your credit card statement or using a credit score service like Credit Karma.
5. What’s the interest rate?
An interest rate is an amount you pay to the bank or lender for borrowing money. So it’s money you’ll have to pay back in addition to the original amount you borrow. It’s really important to know what this rate is as it will tell you how much more you’ll need to pay back.
If you’re taking out a federal student loan, your interest rate will depend on the type of loan you take out as well as the date you begin making payments on your loan. You can find out what your interest rate will be here.
If you’re taking out a private loan, your rate will depend on several factors including who the lender is, your credit score, and how long you have to pay the loan back. You’ll need to ask the lender for this number.
Once you find out what your interest rate is, you also need to find out if that rate is fixed or variable. A fixed interest rate will not change. A variable interest rate can change over time, meaning your payment amounts can vary.
Also be sure to ask if your interest rate will change at any point, as this can mean you’ll end up paying more later on.
6. What fees will I be responsible for?
In addition to interest, you may be responsible for paying other fees. It’s important to know what these are, how much they are, and when they are due. It’s also important to keep in mind that these are often separate from interest rates, so don’t confuse the two!
The biggest difference is that, while interest is paid along with loan payments, fees are often paid upfront. The amount of your fees will have an affect on your interest rate. For instance, getting a loan with no fees will often mean a higher interest rate. This can make sense if you’re planning on paying the loan off in a short period of time.
Always be sure to ask about all fees associated with a loan as they may not be totally obvious.
7. What will my monthly payment be?
Once you’ve determined the total amount you’ll be borrowing, how long you have to pay back the loan, and your interest rate, you’ll be able to calculate your monthly payment. There are several loan payment calculators available online that make this really easy.
In general, most lenders allow loans to be paid back over a period of 10-25 years. The shorter the loan term, the higher the monthly payment will be.
You should absolutely figure out what this amount will be before signing off on a loan to ensure the amount is something that you can manage. You also need to be sure and ask when your first payment will be due as this can vary. For instance, many student loans allow a six-month grace period, which means students have six months before they need to begin making monthly payments. This is meant to allow students to have time to find a job and to begin building a savings. However, some loans do not allow for any grace period and require monthly payments begin right away.
8. How are the loan payments disbursed?
You also need to know how you will receive the money you’re borrowing. For the most part, both federal and private loans require that colleges pay out loans at the beginning of each academic term. This is to ensure that students have the funding necessary to pay all required expenses such as tuition and room & board. Many universities will pay the money out directly into your student account, paying off these expenses on your behalf.
But be sure to find out if there are any special disbursement rules that apply to you. For instance, in some cases, first-time undergraduates will be required to wait 30 days before they receive their first payment. Make sure you know if any of these rules apply to you and plan ahead accordingly.
9. What’s required for the application?
Student loans always come with a set of required documents that are needed to complete an application and determine whether or not a student will receive the loan. Be sure to carefully read the list of requirements for each and every loan you apply for as this can vary.
In general, you’ll need to provide information such as:
Social security number
Most recent tax return (or the most recent tax return of your parents if you’re listed as a dependent)
Other records of income (if you have any)
Don’t forget to check and see if a loan requires a co-signer. This is only the case with private student loans and isn’t required for federal loans.
10. What deferment options are available?
Hopefully, if you’ve taken the steps to carefully ensure that you’re only taking out the exact amount of money you need and that your monthly payments are manageable, you’ll have no trouble paying back your loan. Unfortunately, the unexpected can happen, causing you to run into trouble paying back your loans.
It’s important to know before you sign off on a student loan that you understand the deferment options available to you in the instance you’re unable to make payments at some point. Deferment allows you to temporarily postpone monthly loan payments or reduce the amount your payment each month to avoid defaulting on the loan.
Make sure you understand all of the options available to you ahead of time as well as the consequences for deferring a loan.
Student loans are a great way to help college students take the next step in their academic career. However, it’s incredibly important they fully understand their loan and its terms before signing off on it. Asking the right set of questions upfront can help avoid some major headaches down the road.