Should You Take Out Student Loans: Essential Considerations

It's no secret that getting a degree can help you make more money, but it's also true that student loans can get very expensive very quickly. If you're considering financing your college costs with student loans, here are a few key points to get more information on before committing.

Is Taking Out a Student Loan Right for You

The answer depends on your chosen career path and the school you want to attend. Other points you want to think about are what parts of the college experience are essential to you, if loan forgiveness will be an option in the future (some government positions will forgive your student loans if you work there long enough), and if you really need a degree at all to accomplish your career goals. If you don't know what you really want to do, take a bit more time to decide if you can. If you already know exactly what you want (and it involves tuition costs high enough to need student loans), do your best to apply for as many scholarships and grants as possible to help you borrow less.

What to Consider Before Taking Out Student Loans

What is your expected income after graduation?
Whatever your career path, make sure you know the salary range, both starting out and what you could earn after 10 or more years. Student loan payments can be hundreds of dollars a month, so it's a good idea to make sure your loans will be affordable when you have to start paying them. Remember, you'll also have bills like a housing payment, groceries, phone, utilities, and more. Try out a mock budget to see what your finances might be like after graduation. If the math isn't math-ing, finding alternative funding sources or a different career choice might be good.

How much do you really need to borrow?
Most colleges will have estimates of the cost to attend, depending on whether you'll live on campus, and include fees, books, tuition, and other expenses. Even if you qualify for more, only borrow what you actually need to pay your expenses and not a dollar more. If you think you need more or need money for other things, consider a part-time job or other ways to finance what you need or want to do. Your future self will thank you!

Questions to Ask Before Taking Out Student Loans

What alternatives or additional funding sources are there for tuition?
Alternatives include scholarships, grants, and similar options. Additional sources are part-time jobs, work-study programs, and employer tuition reimbursement. Be sure to do a lot of research on this since the more assistance you can get, the lower your student loans will be. More on this in our article What You Need to Know About Paying for College. You can also find resources through most college websites.

What types of loans are available to you?
There are a variety of student loans, such as federal or private, subsidized or unsubsidized. Some can be a better option due to lower interest rates, flexible repayment, and other options compared to other types of loans. As with everything else, make sure you read the fine print to fully understand what's involved with your choice so you know what to expect in the future.

Who will be the servicer of your student loan?
This is important; it lets you know where to send your payments when the time comes and who to go to with questions or for help.

What is the type of interest rate on the loan? Like mortgages, most student loans come in two flavors-those with fixed rates and those with variable or adjustable interest rates. Fixed rate means the interest rate will never change through the life of the loan, so borrowers have the same monthly payment until it's paid off. A variable interest rate means that your lender can adjust the rate. Adjustable rates often include a lower rate at first to lure borrowers, so it can ultimately mean you'll end up paying more over the life of the loan compared to a fixed rate.

How and when does interest accrue?
Generally, interest begins to accrue the day you receive money from your student loan, even if payments are not due. Because of that, it's a good idea to make at least some payments on your student loans while you're in school to help keep interest accrual as low as possible. Interest is also compounding, which means that interest is added to your total loan balance. Then, interest is charged on that total amount.

What is the total cost of the loan?
It's important to do the math on your loans to see how much interest you would pay in addition to the amount you borrowed in the first place. You can find loan calculators online to use and see how paying different amounts every month will affect your final payoff date. This will help you make informed decisions about the payment you can afford and how long you'll have to pay. Use this information to decide how much you want to look for scholarships and other ways to pay for school.

When are payments required?
Some loan types give you a bit more time after graduation before you have to start paying them back; others require you to start paying three to six months after you get your degree.

What are the terms and conditions?
Every loan comes with a set of terms and conditions. Pay close attention to the interest rate, repayment plan, grace period, and any penalties or fees you could be charged if you missed a payment or paid early. Write down those points, or highlight them if you printed the paperwork so you have a record you can refer back to later.

Are there loan forgiveness or discharge programs?
If you are a government worker, you may be able to get your student loan forgiven or discharged. You can apply for different programs; just look at the criteria and requirements for these programs because they can be a huge help to your future self. Sometimes, these programs require you to work a certain job for a specific period of time, so keep that in mind when thinking about your chosen career path.

What support services do they offer?
This includes whether or not you can combine your student loans if they are all with the same servicer. But, before committing to a lender, ask about and look up reviews for customer service, resources, and any support available through the servicer. You can take advantage of those services and resources until you repay the loan, so it's worth asking. The servicer can help you navigate any challenges you might have if you can't make your student loan payments in the future.

What repayment options are available?
Federal loans generally have various repayment plans, including income-driven options, which base your payments on your income level. Choices like that can give you flexibility as you repay your loans, especially if you face financial hardship after graduation.

What is the repayment period?
How long will it really take you to pay back the loan? This is where loan calculators really come in handy so you can see how those payments will affect your financial plans after graduation. Remember, interest is usually compounding, so you will need to consider that when looking at your monthly payment. If you only pay the minimum amount, chances are you're not paying much more than the interest charge every month, so not much, if any, is going toward the original amount you borrowed.

What are the payment restructuring options?
This service is mostly included with federal student loans (the kind you get by completing your financial aid (FAFSA) application), not private ones. With a payment restructure clause, you may be allowed to adjust your payment amount depending on the amount of money you earn, also known as income-driven payments.

Are there early payment penalties?
Ultimately, private lenders offer student loans to make money. These lenders earn money by charging borrowers interest and fees for the money they borrow. As a result, some loans from private or non-government lenders require borrowers to pay a fee or percentage if they're paying it off early.

Is there a grace period available?
You'll want to know what kind of offerings are provided if you need help meeting your loan obligations later on. In general, federal loans offer borrowers more in this area than private loans. This can include providing borrowers with a penalty-free amount of time if they're having trouble making payments and deferment and forbearance in times of need, like a health concern or loss of a job.

What happens if you have trouble repaying?
Understanding the consequences of defaulting on your student loan is essential. Federal loans offer different options for deferment, forbearance, and income-driven repayment plans during financial hardship. This means those measures are temporary, but knowing what they are can help you get through tough times and prevent default and associated consequences from default. These consequences can significantly affect your credit score, so get to know them well.

WaFd Bank is Here to Help

While we don't offer student loans, we do have a Coverdell Education Savings Account to help save for college. And our friendly bankers are always available for questions, both big and small. Plus, our checking and savings accounts all come with the tools and services you need (and expect) to make saving and managing your money a breeze. To get started, open an account online, visit your local branch, or give us a call at 800-324-9375.