The Checklist Prep for Student Loans

by Nicholas
(Tucson, AZ, USA)

I did not have to take out any student loans during my undergraduate years. It is not surprising that when I was accepted into graduate school, I had to research a ton about student loans. I was overwhelmed by the amount of information available. I found the best financial advice from financial expert and CNBC show host, Suze Orman. I took her advice and perspectives from other students to arrive at these helpful tips when taking out student loans:

1) Listen to your heart. Go to school for a career that you are passionate about and one that will grant a lifetime of happiness. Once you graduate, you will feel more confident and be a valuable team player for your employer.

2) Only take out student loans when necessary. Student loans must be considered a debt and not a free ride to college. (i.e. pay for tuition, books and education costs with loans. Do NOT take out excess loans to support a lifestyle i.e. vacationing, clothes, a new computer, or eating out at fancy restaurants).

3) The amount of student loans that you take out should be lower than the amount of income that you will make after a year’s salary. (For example, if you take out $60,000 for a 4-year degree you should be making $60,000 or more in your first year of income). If your student loans are more than your first year’s income, look for a least expensive school. Take your general prerequisite courses at a community college. Maybe wait a few years and work until you can offset the costs of tuition. Ask yourself: Is this something that I really want to do? Is this something I really have to go to college for?

4) Play with the numbers. How much will it cost in-state or out-of-state? What are the student loan interest rates? After scholarships, savings, grants, and other funds how much in loans will you need? Remember only take out what you need.

5) If possible take out a subsidized government loan before unsubsidized. Currently, subsidized loans are open to undergraduate students. If you must take out a student loan take out a governmental student loan (i.e. a Direct loan). Why? The interest rates are fixed. There are multiple repayment and loan forgiveness programs for government loans i.e. income based repayment. Remember to complete your FAFSA which will help determine if you qualify for particular grants or subsidized government loans. The FAFSA also determines how much you can receive in government loans. (Note: the FAFSA should be completed before the college’s priority deadline. If you have not filed your taxes use estimated numbers until you do file. Then go back and update with revised numbers later).
Private student loans are the opposite of government loans.

Private student loans have variable interest rates (which tend to be higher), may require a cosigner, loans may not be forgiven, and loan does not undergo income based repayment.

The most important thing when taking out a student loan, or any loan is do NOT cosign. Because student loans a majority of the time are not dischargable in bankruptcy. If something happens to the student were the student can no longer pay off the loans, the co-signer will be responsible for paying off the student loans. Co-signers tend to be the student’s parents or partners. Don’t give this financial burden to others. Paying for an education should be the student’s personal priority. There are parent “plus” type loans which may help pay for the additional costs that are not covered by the student’s loans. Again, look into government student loans that are available for parents before private student loans. Parents may help their child, but only if the parent has a great income and financial stability.

6) Listen to yourself, and then seek advice from others. If something doesn’t feel right, do not do it. Sometimes the damage cannot be undone. Some financial aid offices or loan agencies might try to have you take out more loans than needed. They might convince you that you will be making all of this money afterwards when you are done with school based on your career choice. Do NOT listen to them. Life happens and anything can happen in life. (Play the what ifs scenario) What if you do not finish school? What if you decide that this career is not for you? What if? Only take out what you need to pay for school. Unless these people are going to pay for your schooling, simply say “no thank you.” Only you are responsible for your personal finances. Do not be peer pressured by these bullies.

7) The interest on student loans compounds. That means the interest on your loan will keep growing and growing. Analogous to bread dough rising, somewhat slow and all of a sudden a large mess. Try to pay off the principal (starting) balance on your student loans while in school to keep the interest down. Make sure there are no prepayment fees which can occur with private student loans. Depending on where the student loan is taken out, you may be eligible for discounts or a monthly reduction when it is time to repay the loan. These reductions may be a lower interest rate for automatic debit payments made from a checking account. Certainly with any debt, it is better to pay more than the minimum due every month. Come up with a repayment plan. Do you want to pay off your loans in 3 years or 10 years?

8) Do your research. Know the terms and conditions regarding your loan. Know about consolidation, deferment and forbearance. Know when you have to repay. Know the interest rate. Know the loan servicer (who you are borrowing your loans from) and keep in contact for questions or if you are having trouble repaying your loans. If you don’t know something, ask!

9) Repay the student loans as soon as you are done with college and are newly employed. There is a typical 6 month grace period depending on the loan. Look into loan consolidation programs. Try not to place your loans in deferment and forbearance which will delay repayment, but interest may continue to accrue particularly with forbearance.

10) Just because you are paying for tuition with student loans now does not mean that you are covered. This is not the time to splurge in other areas like going out every night, buying a completely new wardrobe, etc. This is actually the time to be grateful for having the opportunity to go to school. Not everyone can afford a college education. Not everyone goes to college. Know your income and expenses. Know that this debt will pay off in the long run for a career that you absolutely love.

Read more tips on Paying Off Student Loans from other students and parents who have been through the student loan process.

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Comment from your friendly team at College Financial Aid Advice

Thank you Nicholas for The Checklist Prep for Student Loans. You've offered some great advice. I strongly prefer that students don't have to take out large student loans, but your tip about loans not exceeding your salary after one year is a great benchmark. Best of luck to you.

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