Know Before You Borrow: Using Student Loans Responsibly

What’s the most important part of college prep? Standardized tests like the ACT, the SAT, or Advanced Placement are key. So is learning to do your own laundry. But the most important in the long-term:  a student heading to college must consider the financial implications of doing so.

Few Americans can afford to pay for college outright. For the rest, financial aid comes from a variety of sources: federal and state government, local organizations and your colleges of choice. The process begins when you fill out the Free Application for Federal Student Aid (FAFSA), which enables the federal government to award need-based financial aid. Grants and work-study are available in addition to subsidized and unsubsidized loans.

First, the potential student must determine the actual cost of attendance at each college under consideration. A private school will have a much higher “sticker price” than a public university, but they may offer more scholarships and greater financial aid, which could make the actual cost comparable or even lower than a public school. Most schools provide an estimated cost of attendance, but yours will differ based on your choices of housing, transportation and personal spending habits. Asking yourself simple questions will help you estimate your costs and better prepare for the transition to college. For example, how large is the campus? Can you walk to most of the places you will visit every day, or will you need a bike or car? How will you make trips home to visit and how often? For housing, consider the environment you prefer as well as the cost when you choose between a dorm, an apartment or living at home or with a nearby family member. Some students prefer the community atmosphere and the resources available in a dorm, while others may prefer the privacy of an apartment. Living with relatives can save you money and provide the comforts of home, as long as commuting is possible and affordable. Take care in choosing your meal plan as well; will you eat most of your meals in the cafeteria, eat out or eat in? All these factors affect your actual cost of attendance.

The simplest rule for taking out loans to pay for college is that a student’s total debt should be less than what the student expects to earn during his or her first year working in the desired field. A student seeking a degree that will land a higher paying job like computer science or engineering can afford to take on more debt than a student studying art or elementary education. Students who plan to continue with graduate school need to consider the debt they will accumulate during both phases of their education.

For a more accurate analysis of loan repayment after graduation, students should estimate their monthly payments for the amount of debt they expect to have. FinAid.org has a helpful payment calculator for determining the monthly payment as well as the estimated annual salary needed to repay the loan.

If you have difficulty making your student loan payments after graduation, you have several options to avoid defaulting. If you have private loans, contact your lender immediately. Lenders are willing to work with you if you are honest about your situation and show willingness to work out a payment plan. For federal Stafford and Perkins loans, you can apply for deferment of payments if you are unemployed or experiencing economic hardship. When in deferment interest does not accrue on subsidized loans but does accrue on unsubsidized loans. Deferment is granted for up to one year at a time, and the total deferment available for economic hardship is three years. After that you must begin making payments again or apply for forbearance, which is granted if you are not eligible for deferment or have used your three year total deferment time. Forbearance, like deferment, is for intervals of up to one year and three years in total. In forbearance, interest accrues on both subsidized and unsubsidized loans, but no payments are required. Federal loans also have options for graduated repayment, income-based repayment or partial loan forgiveness if you work in public service.

Another option to consider if you struggle with making your monthly payments is student loan consolidation. Consolidating loans from different lenders can help you stay organized because you combine all payments into one check each month. It also changes a variable rate loan to a fixed rate for the remaining life of the loan and can lower your monthly payment by extending the length of repayment. However, like any loan, extending the repayment period will mean paying more in total, but if it means the difference between defaulting or eventually repaying the loan, paying more in interest is a fair tradeoff. Consolidation often means losing the grace period after graduation, so if you are still in school and want to consolidate, consider how long it may take you to find a job and if losing the grace period is worth the benefits of consolidation.

If you file for bankruptcy, you are still responsible for repaying your student loans. Student loans may be discharged in rare circumstances in the “undue hardship” case; if you have demonstrated good faith efforts to repay the loan but doing so would prevent you from maintaining a minimal standard of living for an extended period of time. Getting student loans discharged this way is very difficult. The decision varies based on a judge’s view of “undue hardship” and primarily occurs in cases of permanent disability.

Student loans, like car loans and home mortgages, can help students go to college who would not otherwise be able to afford it. However, like any other loan, they must be paid back with interest and have consequences for defaulting. The keys to using student loans responsibly are knowing the loan terms, borrowing only as much as you need and having a plan for repayment.

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