Wait, let me say it again for the people in the back – NO.
While loans are there to help you pay for school, it’s extremely easy to get taken advantage of and set yourself up for at least 10 years of debt post-graduation. Ugh. But you don’t have to be that girl, which is why we’re here to help you navigate the daunting process.
When it comes to financing your education, there are about a million complicated components to consider. And sometimes, despite your hard work and effort, grants and scholarships may not be able to cover your tuition costs.
If you are considering getting loans, get ready to do some research! Don’t just accept what schools offer you because that is probably not the best deal. When schools receive your FAFSA information, they take your estimated family contribution (EFC) and subtract that from the estimated cost of attendance to start figuring out the aid they will offer. The key word there is ESTIMATED. Many of these figures are just educated guesses and can be changed.
In your financial aid package, you may have scholarships from your university, a work-study estimate, as well as state and federal grants. It may not include outside scholarships though, so make sure to consider that when you’re looking at your finances. If your scholarships, grants, and work-study money do not cover your estimated costs, the school may offer you loans. The loans may come from private providers or from the federal government.
So when considering taking out a loan, or multiple, here are the things you should consider:
What kind of loan are you being offered?
There are subsidized and unsubsidized loans, federal and private, and Parent PLUS loans. But what’s the difference!?
Let’s break it down. The difference between subsidized and unsubsidized loans is fairly simple. (These are only available for federally-serviced loans, BTW.) If you’re offered a subsidized loan, the federal government will pay the interest your loan accrues while you’re in school. The unsubsidized loans are just like any other loan, which means they will accrue interest until you pay it off. Obviously, subsidized loans are the better choice between the two, but they’re also only offered based on financial need, so some students may not qualify for this type of loan.
If you’re not offered a subsidized loan, most students can still take out an unsubsidized loan, which might have better terms than a private loan depending on your circumstances.
When it comes to federal vs. private loans, there are a few key differences. Federal student loans are serviced by the government, so their terms and conditions are set by law and often include fixed interest rates and income-driven repayment plans (hallelujah!). Private loans do not typically offer these benefits, which makes federal loans more favorable for most students. If you are considering a private loan offered through your school or from a separate lender, you better pull out your magnifying glass and read all the fine print (which you should do with a federal loan as well). Some private loaners may try to seduce you with a lower interest rate, but without an income-driven repayment plan and with harsh penalties if you miss a payment, which can get you in trouble quickly. Private loans don’t have the same protections and forgiveness programs like there are with federal loans so you have to be extra cautious.
Another option that is available is a federal Parent PLUS loan, this is a great option if your parents are willing to help pay for school. Parent PLUS loans are taken out by your parents (duh) and are also serviced by the government, so they offer fixed interest rates. But unlike your personal student loans, regular repayment begins 60 days after the loan is completely disbursed each year for parents.
P.S. – If your parents are willing to pay for your college or take on the loans for you, you better give them a huge hug and write them a thank you letter after reading this blog. They’re truly giving you the best gift that money can buy and breaking down a barrier to education access you would otherwise have to hurdle yourself. #thanksmomanddad
What even is interest?
Interest is a fickle little b. To make money off of loans, lenders set an interest rate when you take out a loan and will charge you that percentage based on how much money you borrowed.
When you start paying your loans, interest will be paid before any money goes toward reducing your principal loan amount. That means, that if you’re accruing a lot of interest, you may have to pay off that before you even start chipping away at the loan you took out in the first place.
Student loan interest is typically “compounded” daily. Your interest rate is divided by the number of days in the year, and you are charged EVERY DAY based on the outstanding balance. (Those lengthy scholarship applications are sounding a whole lot sexier now, aren’t they?)
This is also why it’s helpful to pay more than your minimum payment if you can, that way you pay off the interest and make a bigger dent into your actual loan balance.
They’re offering me a lot of money, do I need it all?
Probably not. There are some figures that are set in stone at school each year including tuition, student fees, and on-campus housing. As a first-year student, many schools require you to live on campus and get a meal plan, so you’re kind of out of options there, unless you’re commuting to school. But after those non-negotiable costs, there are many things that you can find cheaper than what your school is estimating you’ll spend.
Here are some questions to ask yourself: will you have a car or take public transportation? Can you cut down on rent by getting more roommates or live rent free by becoming a Resident Assistant? Can you borrow your required books from the library or rent used copies? Are you still on your parents’ insurance? Can you shop in bulk or share groceries with a roommate? Are you willing to find a side hustle or another part-time job for additional income?
Figuring out your own budget before accepting loans can help you figure out exactly how much you actually need to borrow. You are in no way obligated to accept the full loan amount offered, and if you get part-way through the semester and realize you’ve calculated your expenses incorrectly, you can always talk to your financial aid office and adjust your borrowing amount.
Some of the expenses schools predict you’ll incur are monthly and can be earned as you’re at school or with the help from your parents. You don’t necessarily need a lump sum at the beginning of the year when you’ll be earning money. And, sometimes getting a lump sum is hard to manage because you have to practice self-restraint and keep that money for rent and groceries instead of buying Coachella tickets.
Do not look at loans as free money. They’re actually the opposite of free. Don’t use loans for shopping or going out because when you graduate you’re going to have to face your loan balance. And trust me, it’s a lot better to look at it knowing you did the best you could spending money ONLY when it was necessary because now you have to pay back all that money with interest!!
Speaking of paying back your loans, if you can, start paying them back before they’re due. (Like, even while you’re still in college, seriously.) I know that sounds crazy, but hear me out. Your first loan payment isn’t due until six months after you graduate. WOO! You’re safe until then. No. Stop. That’s silly.
If you can afford to, start putting something toward your loans while you’re still in school. Even if that is just $50 a month, or $25. A little bit each month can pay down interest on a high-interest loan or unsubsidized loan. Take some of your money from the holidays or your birthday and put that toward paying those loans down. Better yet, ask your relatives to put money toward your loans directly, so you don’t even have to deal with the temptation of spending that money elsewhere. Your future self will totally thank you.
There are options to defer your loan payments if you go to grad school, but that is just putting off the inevitable while those loans are getting MORE expensive because they are accruing interest. I don’t recommend using grad school to delay the real world, whether you’re avoiding financial issues or the prospect of job hunting. Graduate, get to work, and if you were really financially strategic during undergrad, you won’t have to spend your entire paycheck on bills and student loans and you’ll be thanking yourself for that!
BTW- if you’re reading this blog post in hindsight and you already took on way too many student loans, don’t worry. The best way to dig yourself out of this hole and conquer your finances is to look at them every day. Yes, every day! When you’re avoiding money issues, you’re neglecting your financial independence. But if you’re looking at them constantly with a problem-solving mindset (as opposed to self-pity) you WILL make money moves and pay them off faster.
More student loan questions? Leave them in the comments below!