Student loans are sometimes a necessary evil. I would not have been able to attend college without them. Even so, they should be taken seriously, and you should know what you are getting into before signing on the dotted line. It’s easy to jump onboard and sign on because they are the “good debt” that will hopefully enhance your career and set you up for professional success (yet, that is not always the case either).
To aid the process, here are 5 things you need to know before saying yes to student loans.
When I was 17 and first signed the paperwork for my student loans, I had a vague idea of what interest was, but didn’t really know how it worked. Upon graduation, I had a rude wakeup call when my initial $18,000 balance was $23,000. In that moment, I realized how interest worked and that it was accruing the entire time I was in school.
It’s vitally important that you know your interest rates, as they vary depending on the type of loan and lender. For example, federal student loans and private student loans can have vastly different interest rates and terms. Is your interest fixed or is it variable, meaning the lender can change it any time? Is your loan subsidized or unsubsidized? The government pays the interest on subsidized loans while you are in school, while unsubsidized loans continue to accrue interest while you are in school.
While my undergraduate loan’s interest is fairly low at 2.3%, my Graduate PLUS loans are at 6.8% and 7.9%. When I decided to go to graduate school, I knew that my interest rates were much higher, but I didn’t truly calculate how much the interest would cost me. At my highest, I was paying $400 per month in interest. Now it’s closer to $200, which is still incredibly high. Paying interest can often feel like you are walking two steps forward, and one step back. You are inching your way to pay the principal, but the interest gets in the way. Really understand your interest rate, and know if it is fixed or variable.
Your repayment terms are another key thing to know before getting student loans. Once again, federal and private loans have different repayment terms and options, so it’s great to be aware of them before you have to pay anything back.
If you have a federal loan, you are allowed to choose a repayment plan when it comes time to repay your loan. If you do not choose anything, you will be placed on the Standard Repayment Plan. The Standard Repayment Plan offers a 10-year repayment plan, with consistent, monthly payments of at least $50. There is also the option for Graduated Repayment, which offers lower monthly payments that increase over time (presumably as your salary increases). In addition, there is the Extended Repayment plan which offers a 25-year timeline for debt repayment. This option will likely have you pay nearly as much in interest as you are on the principal balance of your loan.
For those who are met with hard times upon graduation, you can use Income Based Repayment, which caps your loans at 15% of your discretionary income. If you are unable to pay off your balance after 25 years, your loan balance will be forgiven. But, don’t get excited yet. You could be hit with a huge tax bill, as your forgiven loan may be considered taxable income. So ask yourself, is it worth it?
For a list of all federal repayment plans, check out this nifty chart.
Private loan repayment is a bit different. According to Student Loan Borrower Assistance, “Private student loans lack the more affordable fixed rates and flexible repayment options that federal loans have. Prospective borrowers should exhaust federal grant and loan options before considering a private student loan.”
Private loan repayment options are generally less flexible and have more stringent guidelines. In addition, many private loans require a cosigner. Your cosigner is responsible for your debt, if you fail to pay it back. In some cases, the death of a cosigner can even result in an auto-default, causing the total balance of your loan to be due immediately. If you get a cosigner, when you are in repayment, look into getting your cosigner released.
Have Clear Expectations About Your Future
Before saying yes to student loans, have very clear expectations about your future. Do you know the typical salary for someone in your field? Standard advice says don’t borrow more than you will make your first year out of college. I broke that rule in graduate school, and I am paying dearly for it. I knew all the tropes about people who major in the arts and humanities and don’t make a lot of money. But I ignored them and was stubborn. Now I’m left with a fairly high debt-to-income ratio and am having a hard time getting ahead. That said, I don’t want to dash your dreams. I do think it’s possible to make a lot of money with non-traditional careers or majors, but it may take a while.
Consider your major, your geographic location, and typical salary for a job in your field before saying yes to student loans.
Pay Now or Pay Later
I remember very clearly feeling like the odd one out when I decided to pay back my loans as fast as possible. Many of my classmates had already submitted themselves to the Income Based Repayment 25-year plan, admitting they could never pay their loans back and that they would wait for the loans to be forgiven. I personally think that is terrible idea.
While they were excited to just pay the minimum now, they may be in for a huge surprise later for their forgiven debt in the form of a tax bill. I really believe, as a borrower, that it’s your responsibility to pay off debt and that you will pay now or later — there are no easy ways out.
Do I wish college was more affordable? Definitely. Do I wish the interest rates on my loans weren’t so high? Yes! But I also believe in taking personal responsibility for taking out loans. That is why I’m so passionate about getting out of debt. I got myself into this problem and I’m going to get myself out.
What Happens If You Don’t Pay
Paying back your student loans can be serious business. If you fail to make payments after 270 days and don’t communicate with your lender, your loan will go into default. Defaulting on your loan is serious as your lender can demand the entire balance plus interest of your loan immediately. Not only that, but it can affect your credit score, which can make it difficult to rent, buy a car, and get a credit card. In addition, your loans will be sent to a collection agency, and your wages can be garnished from your job.
Doesn’t sound fun, huh? The main thing is to communicate with your lender. If you have federal loans, you can apply for deferment or forbearance, which postpone repayment during tough times.
If you are considering taking student loans, or you have no other option, keep these five things in mind when doing your research. As someone paying off student loans, I know how annoying student loans can be, so save yourself some trouble and empower yourself with information.
What else would you add to the list?