5 Things to Evaluate Before Accepting Out a Student Loan

16.9 million. Here are how many students will go to college at the undergraduate level this fall. Of that number, about half – 46% – will take out federal student loans. It’s a decision that could bring some rewards – not least being a well-paid job – but it can also have serious economic consequences.

The average debt for the class of 2017 was estimated to be US $ 28,650. And not everyone can make constant payments on student loans.

As researchers specializing in how money shapes how people make educational decisions, here are five tips for students and families thinking about how to pay for college.

  1. Apply for federal aid now using your old tax returns

While this seems like a routine thing to do, more than 2 million people do not submit a free application for federal student aid, better known as FAFSA. Sometimes parents and students are unfamiliar with this form. Some parents may not be willing to provide tax return information, which is used to determine eligibility for student aid.

The FAFSA submission can be especially important for students whose families have little or no money to pay for college. In these cases, students may be eligible for the federal Pell Grant Program, which is awarded to students with significant financial needs and does not need to be reimbursed. FAFSA filing may also be required for other financial aid students obtain from the state or college they intend to attend.

Beginning in 2015, students can use their “previous year” tax return to complete their FAFSA. For example, a student filing a FAFSA in 2019 may use information from their 2017 federal tax return. FAFSAs for the 2020-2021 school year can be submitted in October 2019, giving students more time to understand and compare financial aid packages and options.

  1. Understand the different types of loans

Different loan options include federal loans, private bank loans, or credit cards.

Federal loans are typically the best option. Federal loans also have deferral, a period when your loans do not accrue interest. They offer a grace period before the repayment and grace period begins, which is a period in which you may be allowed to defer payment if you are having trouble making payments. However, during the forbearance, the monthly student loan balance continues to accrue interest. Federal loans also come with various repayment programs such as income-based repayment.

The subsidized loans are funded by the government and offer better terms. They are need-based and interest-free while you are still in school. Unsubsidized loans may be available regardless of your financial needs, but they accrue interest as soon as the loan is distributed to you.

Contact your financial advisor

Call the financial aid office to find out who your assigned financial aid advisor is at the school you intend to attend. 

Review the different sources of help listed in the financial aid award letter. Some sources of help may be institutional grant aid, which is essentially financial aid offered by the college you intend to attend.

Other sources include federal loans and federal labor studies. The federal labor study is neither a grant nor a loan. Instead, this program allows students to pay for their education costs by working on campus.

Some schools offer packages, such as Parent PLUS loans, directly in the letter of acknowledgment to you and your family.

Understand the impact of debt

Taking out college loans can be an investment in your future, especially when the loan money allows you to work less and focus more on courses to complete your degree promptly. On average, graduates earn much more throughout their professional careers than peers who have not earned a degree.

However, borrowing students should be aware of how much they are borrowing. 

Log into the National Student Loan Data System to learn more about your federal loans. Over 1 million borrowers in the United States are currently in default on student loans after failing to make monthly payments over approximately nine months. Defaulting on student loans can have serious consequences that damage your credit and prevent you from receiving financial aid in the future. The federal government can also decorate a portion of wages or withhold tax refunds. It is also possible to lose eligibility for loan deferral and forbearance and ruin your credit score.

Know your repayment options

When thinking about your repayment options, many factors can influence how much money you may be earning after college, including your primary and career path. Since your future salary can affect your ability to repay loans, borrowers need to have a sense of earnings across different industries and sectors. Still, many college students don’t have a firm idea of how much money they can expect to earn in the careers they’re considering, although this information can be found in the Federal Government’s Employment Perspective Handbook.

There are several options designed to help borrowers repay their loans, including income-based plans and loan forgiveness programs.

To make your income-based loan payments more manageable, consider an income-based repayment plan based on your loan and financial situation. Borrowers must apply for income-based repayment plans. Income-based repayment plans allow borrowers to pay between 10% and 20% of their discretionary income towards student loans each month, rather than the predetermined payment based on the size of the loan.

Borrowers could also seek out loan forgiveness programs offered by their state or for certain professions. These types of programs may be available that provide finance to students during college or that forgive a portion of the loans if graduates enter jobs where qualified people are needed, such as the teaching profession.

Another option could be the public service loan forgiveness program offered by the federal government to students working in public service jobs, such as teaching or nonprofit organizations. however, the vast majority of people asking for public service loan forgiveness have been denied.