What to Know About Student Loans Before You Borrow

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Editor’s Note: This story originally appeared on Living on the Cheap.

Are you considering taking out student loans for your or your children’s education?

It’s not a decision to be made lightly.

Following is the basic information you need to know.

Federal student loans aren’t always superior

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Long ago, private student loans were awarded in ridiculously high amounts and interest rates varied, meaning over a 10-year repayment period you could have a 4% interest rate at times and a 12% interest rate at other times.

Payments could not only top $1,000 monthly but also could also vary by hundreds of dollars because of the interest rate changes.

Now, private student loans are available at fixed interest rates that don’t change and are often less than the parent PLUS loan interest rate. Compare federal parent loan rates with rates granted by lenders such as SoFi.

There is a big difference between loans awarded to students and those awarded to parents

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Parent PLUS loan interest rates are higher than traditional undergraduate student loans, income-driven repayment plan prices are higher, and the only limit is the cost of attendance.

For instance, let’s say a school costs $30,000 per year to attend including room and board, textbooks, etc. The limit for dependent undergraduates for the first year is $5,500.

If the parents qualify, they can borrow much more, up to the full cost of attendance minus all other student aid. Thus, a parent could easily end up with $100,000 in debt from a child’s undergraduate degree.

Credit rating and income determines eligibility for private student loans

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Whether a private loan is to parents or students, credit rating and income do matter. Students getting a loan in their name with limited credit history may get loans with a parent or other more credit-established co-signer.

A co-signer is someone who agrees to repay the loan if the primary borrower can’t. Thus, they are equally responsible for the loan, and the loan payment history also goes on the co-signer’s credit report.

Credit rating may also determine interest rate. For instance, someone with a better credit score may qualify for an interest rate that is two percentage points or more lower than another person’s with a lower credit score.

There are different types of federal student loans

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For students, most federal student loans are either issued as subsidized or unsubsidized loans. Interest on subsidized student loans is paid by the federal government while students are in school with at least half-time status and a few other circumstances. These loans should be used to their limit before taking any other type of student loan.

Unsubsidized loans are available for the remaining amount a student is eligible to receive within normal borrowing limits. Gaps are filled with parent PLUS loans or graduate PLUS loans. Private student loans are also gap fillers.

Remember, you never have to borrow the full amount awarded. I can’t stress this enough. Compare financial aid packages and call the financial aid office to apply for more scholarships and ask about local and department scholarships as well. If you’re still in or recently in high school, ask your high school counselor for help with finding scholarships.

Repayment length and terms vary

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Repayment time frames range from five to 30 years. Five-year repayment is only for private student loans, but it depends on the lenders. Some lenders will have an option of a 15-year repayment term. Longer repayment time periods generally mean smaller payments. While you will pay more interest because you’re borrowing for a longer period of time, you can always pay off the loan early. Generally, there is no penalty for doing so.

The standard repayment time for repaying federal student loans is 10 years. There’s a 20-year plan where payments are based on incomes and up to 25 years for an extended payment plan.

There are consolidated loans with repayment time periods up to 30 years with the payment never rising based on increased income.

An advantage to consolidating loans is that it may make you eligible for Public Service Loan Forgiveness, a program where you can potentially have your remaining balance forgiven for working for a public service employer for 10 years. Student loan consolidation enables borrowers to combine multiple federal student loans into a single federal student loan. Although consolidation lets you pay multiple loans with one streamlined payment, it will likely increase the amount of interest you pay over time

Sound complicated? It can be. Student loan borrowing is a decision that involves comparing interest rates, long-term protections for financial emergencies, and avoiding overborrowing.

The best way to make the decision easier is to fill out the FAFSA so you know all the federal options awarded to you. Then talk to your financial adviser and a college financial aid counselor or a high school counselor about what your options could mean to your family’s future. It’s better to spend a couple of hours making an educated decision on borrowing now than spend years of worrying about the financial impact of loan payments later.

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