What to know before taking out student loans

Student loan debt in the United States is in the trillions (yes, with a “t”) of dollars. Young adults are saddled with so much debt that it’s affecting their ability to take the next steps in their lives, like getting married, having children, and buying a house. If you’ve already got debt, it’s important to consider repayment options that will allow you to get out from under while still maintaining the ability to have a life. But if you’re still looking at college debt as something that’s happening in the future, you’ve got an opportunity to be smarter about borrowing than many who came before you. Here’s what you should know:

Know private vs. federal loans

Student loans are the largest source of debt in the United States after mortgages. Before you apply for any kind of loan, first understand what you’re getting. Nearly 40 percent of students in a recent poll said they were uncertain of the difference between private and federal loans. The main difference is this: The government funds federal loans while banks supply private ones. With federal loans, borrowers can choose an income-driven repayment plan (if they have difficulty affording their monthly payments) and they also don’t have to start paying back the loan until after they graduate. Federal loans provide fixed interest rates. Meanwhile, private student loans could have fixed or variable rates — and you may have to pay if while you are still in school as interest also piles up on top of the principal amount. And unlike federal loans that have different repayment plans if you are struggling with payments, you’d have to work directly with your lender to come up with a solution. It’s best to max out your ability to borrow with federal loans before dipping into the private market.

Know subsidized vs. unsubsidized loans

Another thing all students need to understand is the difference between a subsidized and unsubsidized federal loan. Both may have similar interest rates, so it can be easy to mix them up. Essentially, you don’t have to pay the interest on a subsidized loan while you are enrolled in school at least half-time, also subsidized loans enjoy a six-month grace period for the first six months after you leave school. Unsubsidized federal student loans don’t get these same perks. Also, they don’t require you to prove a financial need to qualify.

Know student loan forgiveness

Student loan forgiveness programs can be beneficial, but don’t base your career and occupation choices on them. These programs are designed to make lower paying careers an option for students who may graduate with significant student debt. Which is why, at least financially speaking, pursuing a job in a higher-paying field is often the better route. The eligibility criteria for these programs is frequently confusing. Typically, workers are required to stick with the same occupation for somewhere between 5 and 25 years to qualify. Unfortunately, the vast majority of folks who apply for Public Service Loan Forgiveness do not end up qualifying. Income-driven repayment forgiveness programs are another option that’s available to federal student loan borrower regardless of whether they are working in public service.

Make a plan

No matter the path you take in pursuing a career and education, it is important to think ahead, do some research, and consult with others who know the ins and outs of college lending and career potential. Remember, college is a brief phase of life and the decisions made in that season can have an impact decades down the road. Be smart, and ensure your earning potential matches your student debt load.


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This (adapted) article by Jean Chatzky (with Hattie Burgher) originally appeared on SavvyMoney blog(Opens in a new Window), and is used by permission.

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