The freshman year of high school is a period of great transition and change, and this year feelings of uncertainty about the future are undoubtedly heightened amid the coronavirus pandemic and economic crisis. In particular, the decision about borrowing student loans to fund your next steps after graduation can be a major concern.
As a high school student thinking about college, it can be hard enough to think about where you’ll see next year, let alone the next 10 or 20 years. For many young people, student loans are their first financial product, so borrowing can feel like learning a new language. It may make you wonder how you can even make the smart financial choices that will prepare you for future success. Fortunately, you don’t have to be an expert to be a knowledgeable borrower.
Before you even consider student loans, make sure you have exhausted all other forms of financial aid that you do not have to repay. In addition to grants assistance, a school counselor can be a great resource for finding scholarships, especially local grants.
If you have exhausted these options and still need funds to cover tuition and living expenses, then you should consider student loans. When you decide, keep these five facts in mind:
- Student loans must be paid off with interest.
- Federal student loans should be your first choice.
- You do not have to accept all the loans offered to you.
- Consultation upon entry and exit is very important.
- You can make the payments while you are in school.
Student loans must be paid off with interest
When you borrow student loans, you agree to pay that amount in full plus any interest owed. You still owe that money even if you haven’t finished your degree or credentials, are unhappy with your education or are finding it difficult to find a job.
While there are limited circumstances under which you can forgive or forgive your loans, in most cases you can expect to be repaid. In general, you should not make a decision about borrowing with the expectation of loan forgiveness. One exception is the Federal Public Service Loan Forgiveness Program, which offers loan forgiveness after 120 eligible monthly payments in a qualifying repayment program while working for a qualified employer.
Once your student loans go into repayment, it’s important to avoid default. Leaving your loans behind or in default can have serious consequences, such as difficulty borrowing in the future, exorbitant debt collection costs and the potential for withholding of wages—a legal action by which your employer must hand over a portion of your earnings to pay off your debt.
Federal Student Loans Should Be Your First Choice
If you decide you need to borrow to pay for school, exhaust your federal student loan options first. These loans tend to have the lowest interest rates, the best benefits for the borrower, and the most guarantees that exist to prevent you from getting into situations of delinquency or default if you run into financial difficulties.
Submitting the Free Application for Federal Student Aid, or FAFSA, should be the first step in the financial aid process. It determines your eligibility not only for federal student aid such as the Pell Grant, but also for many forms of government and institutional assistance. You must also file a FAFSA to qualify for federal student loans.
There are two types of federal loans for college students: subsidized and unsubsidized direct loans.
Subsidized loans for students with proven financial need. The federal government pays interest on loans while the student is enrolled in school at least half the time, during the six-month grace period after the borrower leaves school and during periods of deferment.
Unsubsidized loans are available to all eligible students regardless of financial need, and borrowers are responsible for interest from the time loans are disbursed, including while they are deferred. The borrower will have to pay this interest when the loans go into repayment, at which point the interest is added to the amount borrowed. This is called capitalization, and it increases the monthly payments as well as the loan balance on which future interest accrues.
If you’ve reached your borrowing limits for subsidized and unsubsidized student loans, you may want to consider private lenders, which include state and nonprofit banks and credit unions. Always compare several options, ask about any advantages the borrower may offer, and pay attention to the total amount you borrow. You are not allowed to borrow more than the cost of attendance, which your school charges.
You do not have to accept all the loans offered to you
As a student, you can borrow up to cost of attendance less than other aid to pay for tuition and related educational expenses such as room and board, transportation, books and other eligible expenses. But you don’t have to borrow everything you qualify for unless you really need it.
Once you are accepted into the institution of your choice and submit your FAFSA, your school will send you a financial letter listing your eligibility for any assistance including federal student loans. This message will usually tell you the maximum amount you can borrow, but it is not always clear when you can borrow a smaller amount.
If you don’t need to borrow the amount in your bonus letter — for example, you might plan to take a part-time job to pay living expenses or books — then you can turn down the extra money. This will save you money over time because you won’t have to pay back the money you didn’t borrow or the interest that will come with it.
If you have questions about the award letter, contact the financial aid officer at that school.
Consultation upon entry and exit is very important
You may be tempted to quickly search for required entry counseling when accepting subsidized or unsubsidized federal loans and mandatory exit counseling when leaving school before repayment begins. However, self-guided sessions are important because the information is meant to ensure that you understand the terms and conditions of the loans you get and your rights and responsibilities. You also learn the basics like how interest works.
Most importantly, you will also learn about the repayment options available to you, which are vital information to have in case you run into financial difficulties and need to lower your monthly payments with an income-driven payment plan.
Ensure that you get the most out of your entry and exit counseling by cutting out at least 30 minutes of uninterrupted quiet time and taking notes as needed. If you have questions, write them down and reach out to your college financial aid officer.
You can make payments while you are at school
If you decide to borrow unsubsidized federal direct student loans, remember that you are responsible for paying the interest that begins to accrue from the time the loan funds are paid off. To avoid additional costs of capitalization, you can choose to pay interest while you are in school. Contact the loan service for information on how to do this.
It’s easy to see why it’s important to think carefully about how much you can borrow for college and how much money you expect to earn when you graduate. The federal government offers plenty of free resources that can help, including the US Department of Education’s College Scorecard, which can help you assess and compare college costs, and the Consumer Financial Protection Bureau’s Financial Pathway to Graduation Tool, which can help you estimate how You will owe a lot, and if you can afford this debt.