You’ve worked hard to get into school but navigating how to pay for college – even with financial aid can be difficult. But it doesn’t have to be a complicated financial decision.
Borrowing money to pay for college is an option for many students. You can borrow money (student loans) to pay for school from the federal government or private institutions (such as banks, credit unions, and private lenders like College Ave). Student loans can cover the cost of tuition and fees, room and board, books and supplies, transportation, and other school-related expenses.
There’s a lot to consider before deciding if a student loan is right for you. Let’s walk through some of the things you should be thinking about as you decide if you should borrow to pay for college.
What Is Student Debt?
Before you take out a student loan, you should understand student debt.
Student debt is money borrowed to finance your education with the expectation that you will repay that money upon completion of your degree program. You’re typically expected to start paying back your student loan debt upon graduation but making payments, even small payments during school can help lower your total loan cost.
According to the non-profit, Institute for College Access and Success, 65% of students in the class of 2018 graduated with student debt.
When you begin student loan repayment, you start to build your credit. If you cannot make payments, there are several options to consider for repayment, such as making income-based payments, deferment and forbearance, and refinancing. Reach out to your student loan servicer immediately to explore your options.
Before taking on student loan debt, you should always explore free sources of funding for your education first, such as grants and scholarships. This way you can borrow only what you need.
Learn more about how borrowing and lending work.
Look for Free Money
It’s always a good idea to seek out private scholarships and grants first. This is free money being given away by businesses, service organizations, and other non-governmental entities that don’t have to be repaid. Each has its own qualifications and deadlines. Most scholarships and grants are awarded per year and typically do not cover the full cost of attendance.
After you’ve exhausted all your options seeking “free” money for college, then you can turn to student loans. Student loans can be used to cover what other aid can’t cover in your total college costs.
Weigh All Federal Options
You should fill out the Free Application for Federal Student Aid (FAFSA), starting on October 1st, the year before you plan to attend college. The FAFSA is how you can qualify for federal aid, such as federal loans and grants such as the Pell Grant.
Learn how to apply for the FAFSA.
Is Borrowing for School Worth It?
One way of deciding if you should borrow to pay for college is to evaluate your earning potential once you graduate. Studies from the New York Federal Reserve and Georgetown’s Center on Education and the Workforce show that those with college degrees tend to earn more per year and over their lifetimes than high school graduates.
Taking out a loan to pay for that advantage in lifetime earning potential could make sense. But you should be able to afford the payments when they begin after graduation.
Learn more about why a college degree is worth it.
How Will You Repay What You Borrow?
Before you decide if you should borrow to pay for your college education, think about how you will be able to repay.
To help figure out how you will repay your loan, consider these two things.
- Will you start paying back the loan during school? Paying back your loan during the typical in-school deferment period lowers the cost of the loan and reduces the amount of debt you will have once you are required to start making payments.
- Will you make enough once you graduate to start paying back the loan? Think about if your expected salary out of school will enable you to repay your loan. One common way of looking at it is that if your total student loan debt at graduation is less than your expected annual salary, you should be able to repay the loan in about ten years.
Factoring in how you will pay back the loan will help you understand if borrowing is the right decision for you.
Learn more about what is reasonable and affordable debt.
Carefully Consider Your Student Loan Options before Borrowing
Once you decide that you will need to borrow to pay for college, think about which loan is right for you. There are two types of student loans, federal student loans and private student loans. and they come with different repayment plans.
Federal student loans are owned by the U.S. government. Private student loans are owned by non-federal entities such as financial institutions, banks or credit unions. Generally, you should explore your federal student loan options before deciding if you want a private student loan as they usually offer low fixed rates and various repayment assistance programs.
Students who show financial need may receive subsidized loans from the federal government, meaning the government pays the interest while you are in school (at least half time) and the first six months after you graduate.
Learn more about the difference between federal and private student loans.
Pay attention to your interest rates. The lower the interest rate, the lower the cost of your student loan. Interest rates on federal loans are set by Congress each year and are fixed. Interest rates on private loans may be fixed or variable, which means they fluctuate according to market forces.
And consider your repayment terms or the amount of time required to pay the loan back. The longer the term, the more you will pay overtime for the loan, but you will pay less every month. The shorter the term, the less you will pay overtime for the loan, but your monthly payment will be higher
Learn more about our private student loans options.
Use a Student Loan Calculator to Help Decide If You Should Borrow to Pay for College
A student loan calculator can be an invaluable tool in deciding if you should borrow to pay for college. Our student loan calculator considers the number of years you are in school, loan amount, loan term if you make monthly payments in school, and interest rates.
You can explore what your monthly payments might be and how much the loan could cost over its lifetime. Having an idea of what your monthly payments could be can help you understand what you can afford and if you should borrow to pay for school.
Visit our student loan calculator.
Always Borrow with Your Future in Sight
Does it make sense to finance a portion of your college education by borrowing for school? You should always consider the pros and cons of borrowing, especially when it comes to your financial situation.
But while a college education is more than a financial decision, there are other factors beyond finances that you should consider. If you are confident that the degree you will receive will lead to lifetime earnings power in excess of what you might earn without the degree, then some amount of debt can be justified. But be realistic about post-graduation debt and income levels.