Senior year of high school is a big time of transition and change, and this year feelings of uncertainty about the future are undoubtedly heightened amid the coronavirus pandemic and the economic crisis. In particular, the decision about whether to borrow student loans to finance your next steps after graduation might be a source of significant anxiety.
As a high school senior considering college, it can be hard enough to think about where you see yourself next year, let alone in 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. That may leave you wondering how it's even possible to make the smart financial choices that will set you up for future success. Fortunately, you don't have to be an expert to be an informed borrower.
Before you even think about student loans, make sure to exhaust all other forms of financial aid that you do not have to repay. In addition to grant aid, your school counselor can be a great resource for finding scholarships, especially local ones.
If you exhaust those options and still need money to cover the cost of tuition and living expenses, then you should consider student loans. As you decide, keep these five facts in mind:
-- Student loans must be repaid with interest.
-- Federal student loans should be your first choice.
-- You don't have to accept all the loans offered to you.
-- Entrance and exit counseling are very important.
-- You can make payments while in school.
Student Loans Must Be Repaid With Interest
When you borrow student loans, you agree to repay that amount in full plus any interest that accrues. You still owe this money even if you don't finish your degree or credential, are unhappy with your education or have difficulty finding a job.
While there are limited circumstances under which you can have your loans discharged or forgiven, in most cases you can expect to repay. In general, you should never make a borrowing decision with the expectation of loan forgiveness in mind. 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 qualifying employer.
Once your student loans enter repayment, it's important to avoid falling behind on payments. Letting your loans fall into delinquency or default can lead to serious consequences, like difficulty borrowing in the future, expensive debt collection costs and possible wage garnishment -- a legal procedure in which an employer must hand over part of your earnings to pay off your debts.
Federal Student Loans Should Be Your First Choice
If you determine that 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 borrower benefits and the most safeguards in place to keep you from entering delinquency or default if you experience financial difficulties.
Filing 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 state and institutional aid. You must also file the FAFSA to qualify for federal student loans.
There are two types of federal loans for undergraduate students: direct subsidized and unsubsidized loans.
Subsidized loans are for students with a demonstrated financial need. The federal government pays the interest on the loans while the student is enrolled in school at least half 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 the interest from the time the loans are disbursed, including while they are in deferment. The borrower will have to pay this interest when the loans enter repayment, at which point the interest gets added to the amount that was borrowed. This is called capitalization, and it increases monthly payments as well as the loan balance that future interest accrues on.
If you reach your borrowing limits for subsidized and unsubsidized student loans, then you may want to consider private lenders, which include state-based and nonprofit banks and credit unions. Always compare several options, ask about any borrower benefits the lender may offer and be mindful of the overall amount that you are borrowing. You are not allowed to borrow more than your cost of attendance, which is calculated by your school.
You Don't Have to Accept All the Loans Offered to You
As a student, you can borrow up to the cost of attendance less other aid to pay for tuition and related educational expenses such as room and board, transportation, books and other qualifying expenses. But you don't have to borrow all that you qualify for unless you truly need it.
Once you are accepted to the institution of your choice and submit your FAFSA, your school will send you a financial award letter that lists your eligibility for any aid including federal student loans. The letter will typically let you know the maximum amount that you can borrow, but it's not always clear when you can borrow less.
If you don't need to borrow the amount in your award letter -- for example, you may plan to get a part-time job to pay for living expenses or books -- then you can decline the excess funds. This will save you money over time because you won't have to pay back money you don't borrow or the interest that would come with it.
If you have questions about your award letter, contact a financial aid administrator at that school.
Entrance and Exit Counseling Are Very Important
You may be tempted to quickly skim through the entrance counseling required when accepting federal subsidized or unsubsidized loans and the mandatory exit counseling when you leave school before repayment begins. However, the self-guided sessions are important because the information is intended to ensure that you understand the terms and conditions of the loans you take out and your rights and responsibilities. You also learn basics such as how interest works.
Importantly, you'll also learn about your options for repayment, which is vital information to have in case you experience financial difficulties and need to lower your monthly payments with an income-driven repayment plan.
Make sure you get the most out of entrance and exit counseling by blocking off at least 30 minutes of quiet, uninterrupted time and taking notes as needed. If you have questions, jot them down and reach out to a financial aid administrator at your college.
You Can Make Payments While in School
If you decide to borrow federal direct unsubsidized student loans, remember that you're responsible for paying back the interest that begins accumulating from the time the loan money is paid out. To avoid the added costs of capitalization, you may choose to pay the interest while you're in school. Contact the loan's servicer for information about how to do that.
It's easy to see why it's critical to think carefully about how much you borrow for college and how much money you can expect to earn when you graduate. The federal government offers plenty of free resources that can help, including the U.S. Department of Education's College Scorecard, which can help you assess and compare college costs, and the Consumer Financial Protection Bureau's Your Financial Path to Graduation tool, which can help you estimate how much you'll owe and if you can afford that debt.