Should You Use Student Loans?

student loans

As the economy has dipped and swayed in the last few years, the amount of available jobs has dropped. It used to be that you had to go to college to secure a decent job, but now it seems like you have to go to college to get any job. Unfortunately, college does not seem like an option for everyone. Many believe they cannot possibly afford a college education or refuse to pay such high tuition and expenses. Others hope for scholarships to help offset the debt. Sadly, however, colleges are continuing to increase tuition, states are cutting back on free student funding and many schools are replacing student grants with funds.  So what does that leave? Loans.

The idea that you have to pay a large chunk of money now so that an employer can pay you later blows my mind. And depending on how you choose to pay for your college years, may mean you will spend your income for decades after graduation paying off your college education. So what is the best way to pay for college? I’m not sure anybody could give you one exact answer. In fact, deciding how you will afford further education is very situational. Let’s look at student loans and see if they are right for you.

There are two types of student loans: private loans and federal loans. Now, after a little research, I could not find a source that DOES NOT say federal loans are the best way to go. In fact, all sources say to not take out a private loan unless you have exhausted your federal loans. Why is this? Private loans are received from banks and credit unions that set their own variable interest rates—some as high as 18 percent.

Over time, these rates may change, either increasing or decreasing, but is it really worth the chance of owing more money? Sure, private lenders often advertise low rates and easy applications, but the truth is, private loans are based on your credit report. If you have a poor score, you may have a higher interest or may even need a cosigner.

On the other hand, federal loans from the U.S. Department of Education offer a fixed interest rate, which is actually often less than the interest rate of a credit card. As an added bonus, you may have the option to subsidize your federal loan. What does that mean? A subsidized loan means the government will pay the interest on your loan while you are in school, as long as you are enrolled at least halftime. And as if it didn’t get any better, the interest you pay on the loan may be tax deductible if you qualify. Now, this doesn’t apply to everyone, and there are some restrictions to take into consideration including how you file taxes, what institute you attend, your current income, living situation and if you are a dependent.

If you are a dependent, it’s okay. You may not get the tax break, but you can sign for the loan all on your own with out a cosigner and without your credit score getting scrutinized. After all, how do you expect to have good enough credit at this stage of your life? If you are able to make the payments on time, your credit score will improve greatly.

Not able to make payments on time? Federal loans offer an income-based repayment plan. While still enrolled in school, you do not need to make any payments on your loans. Once you graduate, your monthly payments will be determined by how much money you earn.

It sounds nice but here’s the catch with federal loans and often applies to all loans— a deferred payment (not having to pay while enrolled) saves you money while you are a student, but all of those payments you put off are going to add up. When you finally graduate, you will not only still have the principal to pay down, but you will have to pay for the interest that has added up in the past years as well, and that can get costly.

This also applies to loans with long terms and a lower interest rates, which doesn’t necessarily mean it will cost less in the end. The longer you have the loan, the more money you will have to pay interest on. If that doesn’t make sense, think of it this way—if you are paying 5% interest on a 10 year loan for 6 years, each month your payment will be higher causing the money you are paying interest on to decrease rapidly. On the other hand, if you are paying 3% on a 20-year loan, that is twice as long as the money will accrue interest—even at a lower rate.

So, before you go applying for a loan anywhere, think it out first. Shop around and try to determine how you can offset such a large amount of money. Make sure your income or planned income is sufficient enough to make those monthly payments and boost your credit score. If not, check into scholarships and secondary options. But whatever you do, do some research and pick the best option for you.

Comments

  1. Good tips! I’ve never applied for a student loan, but using low interest credit, have managed to help fund my career as an author and freelance writer. The key is to find affordable rates with fair terms.

  2. Furthering your education is always a wonderful idea but the daunting thought of student loans can scare anyone away. As with any loan, it is so important to read, read, read. You must know what you are getting into. :-)

  3. The saying “buyer beware” should always hold true, but for high school students looking to go to college, it doesn’t seem like they are presented with a variety of information from the school counselor and many parents have no idea about the entire process. The school I used to work at provided one FAFSA seminar, and that was it.

  4. I think the first step is to ensure that you’re enrolling in a curriculum that will lead to a job. Taking a liberal arts degree to be “more well rounded” is no longer affordable. Employers want people with skills, so not matter how much you save on choosing the right student loan any amount will be too much to pay back if you can’t get a job and don’t have any income. Be wise in both your choice of an education that will get you a job and how you finance it.

  5. I know it isn’t applicable for everyone but I have a friend who works at the corporate HQ of a franchise business and he said one trend they are noticing is parents offering to buy their kids a franchise instead of paying for college, because the money achieves a greater return. Not for everyone, and only tangential to your post, but gave me something to think about.

  6. It’s a tough call being a student these days. But it seems that for most people there is really now way round it but to take out a student loan. Fantastic that you’ve outlined the various options here.

  7. Oh, I remember the days when I had to pay my loans. Glad that is gone and over. Of course, now we have our children starting college (my eldest is a freshman). Hope we can teach them the value of money and as you say, borrow wisely if necessary.

  8. It is disappointing that to do much of anything now, you pretty much need to go to college. And then they rub salt in the wound by making the cost of schooling so high that you pretty much are required to go into debt for the majority of your life to pay for it.

  9. Ha! I had never thought of a loan in the way you described – taking out a loan in order to get an employer to pay you to pay off the loan. Absolutely mind boggling!
    I find it sad that there is not more consideration from Governments on extended education.
    We have a savings fund for my son that we have started (he is 3) but I think it will only benefit getting him through a private school in his later years. I do hope we have enough to help out with University (your College equivalent) but I am doubtful.
    It is really sad to have to have to start out behind the 8 ball…

  10. Good article. My son is looking at getting a loan to go back to school. We were not aware that if you defer the payments until after you finish that the interest is still being charged. Yet that makes sense, duh…we just hadn’t thought about that.

  11. Thanks for this Mary. My husband spent years and years repaying his school loans and now my oldest is just a few years away from graduating from high-school and we have been wondering if we will ever get off the treadmill. Doing the financial homework may seem tedious, but its no where near as tedious as paying for a student loan you can’t really afford.

  12. It is so important to receive higher education and the cost can be extremely daunting. I have a friend who is going back to school and has used Federal Loans. As scary as it is, she knows that the money owed it worth it. :-)

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