10 Questions to Ask Before Taking Out Student Loans

By Lorena Roberts on February 21, 2018

The majority of today’s college students are pressured to take out student loans. There are the never-ending questions about what your undergraduate education is actually worth. If you’re anything like me, you’re weighing your options in your head:

  • Should you take out a lot of student loans in order to attend your dream school — that private school you got into,
  • Or should you take advantage of the in-state discount you’re receiving at the closest state school and the scholarships they’re handing out like candy…

It’s a tough decision. I hope you know that many came before you and had to make this decision. And many will come after you. But what you shouldn’t do, is decide whether or not to take out a student loan before you find the answers to all the important questions. Because even if you decide not to take one out this year… you might need one by next year.

It is highly unusual for a college student to make it through their education without taking out a student loan. In fact, the average amount of student loans that the class of 2016 had upon graduation was upwards of $40,000. If that’s not shocking enough, think of it this way: Americans owe almost $1.5 trillion in student loan debt alone. On average, young people are paying $350 per month on their student loans. That’s a second car payment. It’s incredible! So if you’re going to take out a student loan, there are 10 things you need to be sure you ask – so you can feel fully prepared.

via pexels.com

1. Who’s co-signing for you and what does that actually mean?

If your parents are going to co-sign for your student loan, you should know what that means before you (or your parents!) agree to it. Co-signing is a way for the loan company to have insurance on your loan. So if you don’t make a payment, they can actually hold your co-signer responsible. There are benefits to having someone co-sign for you (like your interest rate might be lower, and they might have better credit). But there are also some risky situations you might get in to – so always talk it over before you sign.

Co-signer releases are a “thing:” After the person who’s taken out the student loan has made a number of on-time payments, the co-signer can sometimes be removed. So you’re a bit like an intern in that you need some supervision for a while, but then you’re able to “go out on your own.” The company providing the money for your education wants to be sure they can trust you to make your payment on time and in the full amount. Check into whether or not a co-signer release is an option with the loan you’re wanting to take out.

2. Weigh your options: starving college student or starving adult?

The more money you take out now, the more you’re going to have to pay later. So which do you prefer: having a tight budget while you’re in college, or having a tight budget once you’re an adult? It’s hard to have a mortgage payment and a student loan payment and try to live life as an adult. You’ll probably start to feel like you’re having to dig yourself out of a hole. Everything you make will probably pretty quickly be spent on your monthly bills.

3. What’s the interest rate? What does this mean?

Interest is an added amount that you’ll pay back on top of your student loan. Think of it as the “service fee” for borrowing the money that you don’t have. I used to think when you borrowed $20K of student loans, you paid back $20K. But that’s not the reality. You’ll actually end up paying back much more than just the initial amount because it will accumulate over time. Even while you’re in school, interest is being charged to your total student loan bill. Before you take out a student loan, know what the interest rate is and whether or not that interest rate is reasonable.

4. What are your repayment options?

The longer you are willing to take to pay off your loan (and accrue the interest), the smaller your monthly payments will be. So if there’s an option for you to take 30 years to pay off your loan, your payments will be much smaller than if you’re forced to pay it back within 15 years.

When it’s time for you to start paying back your loans, know what your repayment options are. Maybe you make enough to cover the monthly payment, so maybe the plan you have is working. But maybe you aren’t! Maybe you have a job and you’re making money, but the payment they’re requiring is too high for you to pay on a monthly basis. You should look into income-driven repayment options for your student loan.

If something has happened recently and screwed up your financial situation, there might be an option for you to defer your payments. Deferring might be an option for those who are unemployed, or who qualify for economic hardship.

A good website to check out for concrete examples of repayment options is mygreatlakes.org.

5. What will the total amount of accrued interest be when you finish college?

The words “accrued interest” might scare you — but don’t let them! Adding up how much interest is going to be accumulated while you’re in college will help you estimate what your monthly payment is going to be once you’ve graduated. The higher the interest rate when you take out a student loan, the larger your payment is going to be once you graduate. You might feel like you aren’t taking out that large of a loan, but once you add on all the interest that’s going to be piled on top of your total, you might change your mind. You should be sure to explore all the implications of interest and how that will accumulate over the four to five years that you’re in college.

6. What’s the relationship between how much you’re going to take out in loans and what your future salary has the potential to be?

If you’re getting a degree in a high-paying field, it’s obviously less detrimental to have a lot of student loans. People usually think about medical school this way. Medical school is a HUGE investment on the front end, but your salary for the rest of your career has HUGE potential. A $300 loan payment every month might not be that big of a deal. But if you’ve chosen to get a degree in a field that doesn’t pay nearly as well, like being a teacher, it makes less sense for you to take out six figures of student loans. Before you take out a student loan, consider your possible salary: are you going to make enough to justify the amount you’re willing to borrow?

via Pixabay.com

7. Have you considered all of your options?

Are private loans the only option you have for funding your education? Have you done your research when it comes to grants and scholarships? Don’t kid yourself – a quick google search doesn’t count as “doing your research.” There are lots of resources out there to help you fund your education without having to sign your life away to mounds of student loans.

I’ve recently discovered that some of my friends have actually taken out a student “loan” from their parents. Because paying for college was the student’s own responsibility from the beginning, parents are sometimes unwilling to budge on helping to pay for tuition. However, there might be way around this “family rule.”

If you can “take out” a loan from your parents, chances are, they’ll likely not charge you the same interest rate your bank is offering to you, or maybe not charge you any interest at all. This is probably the best possible situation (next to them just caving and paying your tuition for you).

infographic, student loan, going into debt, taking out student loans

by Lorena Roberts via canva.com

8. Can you take a gap year?

It’s becoming more and more popular for students to “take time off” after high school or after undergrad. Sometimes traveling the world or getting a full-time job has more immediate benefits that embarking on another educational journey. If you’re looking into taking out student loans to pay for your education, think about whether or not it’s an option for you to take a gap year! Depending on what your current credentials are, you might be able to work full-time, live at home, and watch your spending in order to save up for the next part of your education!

Many of the people I know took a gap year in order to save money, but also to figure out what they want to do with their lives and who they really are as people. It’s tough to be 18 and decide what you want to be “when you grow up.” Sometimes it’s tough to decide after you receive a Bachelor’s degree. I know plenty of people who have struggled with figuring out who they really are and how they want to contribute to the world. A gap year might be your best bet. Think about it, at least.

9. Is it a good investment?

Some people will always vouch for investing in education. They’ll tell you there’s no way that can be a “bad decision.” But when it comes right down to it, there’s always the possibility that investing in a degree could be a bad investment. If you’re looking into getting a degree that doesn’t have large immediate returns — like any kind of major that’s going to require graduate study — you should consider what you’re willing to take out in loans.

For instance, as a psychology major, I knew I would have to attend graduate school in order to pursue the career I want. That’s typical in psychology, because undergraduate degrees in this field are incredibly general. You’re barely qualified to do anything following graduation. So I wasn’t willing to go into $100K worth of debt, knowing I’d have to fund my graduate education. Have you thought about what comes next? Have you considered having to pay for an additional degree?

It makes much more sense to take out loans for the degree that’s going to get you farther — and have a better return on your investment! – than it is to go deep into debt for a Bachelor’s degree in a field that can’t support your career goals by itself.

10. How long will you be in debt?

Loans for medical school will be worth the investment. Your salary after school will be decent enough to pay your bills and pay down that loan payment quickly. But if you aren’t going to medical school and you’re taking out loans for your education, think about how long it’ll take you to pay them off. Maybe you’re okay with being in debt for the next 35 years. Maybe you’re fine with that. But more than likely, you aren’t. So consider how many years of your life you’re willing to be in the hole. Remember that it’s never too late to take time off, work to save money, and lessen the amount you need in loans.

The worst thing you can do to yourself is take out a student loan without knowing what you’re getting yourself into. Most students have to take out loans in order to make their educational goals possible. You might not think about how a student loan will impact your future, but you should definitely consider what this will make your life like in 20 years. You might still be making monthly payments on a loan that was way bigger than it needed to be. Be careful out there, folks.

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