Before Applying for a Student Loan
So, awarded financial aid isn’t enough to cover the full cost of attendance and you know you or your student will need additional student loans to pay for college. Before filling out loan applications, consider future repayment for any loans. Here’s what you need to know.
Federal student loans are limited.
Undergraduate students can take out only so much in federal student loans each year. If additional student loans above that limit are required, you may need to consider private student loans or parent loans.
Undergraduates need adult assistance.
Students need to have a creditworthy cosigner for any private student loans, unless they can meet underwriting criteria on their own. If parents are willing to consider a federal Parent PLUS Loan, the parents will need to borrow that money and be responsible for paying it back themselves.
The debt will need to be repaid.
Student loans are not usually dischargeable for bankruptcy or other financial hardship. When you think about a future repayment amount, remember:
- The repayment amount will be more than the original loan amount. Student loans accrue interest on a daily basis. At certain times, unpaid accrued interest may be capitalized, or added to the principal balance, and begin accruing interest as well.
- Payments may come from a limited income. Carefully consider how much a graduate with the same major can realistically expect to make in an entry-level position. Add anticipated student loan payments for all the undergraduate years, including any federal loans in the financial aid package, to anticipated expenses for a realistic budget based on a starting salary. If all your expenses can’t be covered with a realistic starting salary, student loan debt may need to be reconsidered.
Interest and other payments can be made during college.
Most lenders allow early or extra payments on student loans at any time without penalty. In addition, paying interest as it accrues during school can reduce the amount of interest that will need to be repaid after graduation.
Private student loans vary.
Every lender has its own underwriting criteria, qualification requirements, loan terms and repayment schedules. Before you sign for a loan, research your options. Consider:
- Variable vs. fixed interest rates. A variable rate may go up or down according to market conditions, while a fixed rate remains the same throughout the loan term. A low variable rate is often appealing, but remember that it may change drastically over the loan term.
- Actual interest rate. Many lenders offer different rates based on the applicants’ and cosigners’ credit. If you are unable to determine your rate upfront, consider the highest rates.
- Repayment assistance and benefits. Some lenders or loan servicers offer assistance if a borrower is unable to make required monthly payments. Some loans also offer special benefits, such as a reduced interest rate for making automatic electronic payments. Consider these features carefully.
- Managing repayment. Will additional loans be needed for future years? Should all loans be obtained from a single or limited number of lenders to make repayment easier? Will consolidating multiple loans later be important, and does the lender offer that option?
College choices matter.
If you find that you or your student cannot afford to take on enough debt to pay the full cost of attendance, a new plan might be essential. Some options students have include:
- Earning more. Increase the ability to pay college costs as they occur by earning more income during school terms and on breaks.
- Reducing expenses. The full cost of attendance may include expenses that can be cut. Can living off campus without a meal plan save money? Are the book and fees and transportation costs realistic for you or your student?
- Asking for help. Are relatives willing to help pay for college? Are additional scholarships, either through the school or outside entities, available?
- Attending a less-expensive school. If the cost of attendance is still not affordable without taking on unmanageable debt, you may need to consider attending a less-expensive school, at least for a year or two.
Visit Student Loan Game Plan for more information and tips.