With an unstable economy and uncertain employment after graduation, taking on a lot of student loans is clearly a risk, but often a necessary one. For most undergraduate students loans are the only way to reach the goal of a college degree. According to The Project on Student Debt, “7 in 10 college seniors (71%) who graduated last year had student loan debt.”
This kind of funding makes higher education possible, but there’s a point at which the payoff might not be worth the investment. Before you decide what is right for you, get a better picture of how loans can help or hurt your future. What do you need to consider before accepting a loan?
Types of Student Loans
Loans are often part of a financial aid package that can also include grants and scholarships. Before you accept a loan exhaust all grant and scholarship possibilities. These take time to find and apply for, but don’t have to be repaid. Loans do have to be repaid within specific terms you agree to when you accept a loan offer (i.e., interest rate, time to repay, repayment amounts and frequency, grace periods). There are four basic categories of student loans:
- Federal Loans: Funded through the U.S. Department of Education, these Stafford, Perkins, and PLUS loans usually have flexible repayment terms and lower interest rates.
- State Loans: Made available through your state’s department of education, these loans and their terms vary by state.
- Institutional Loans: Provided through the college you are attending, the amounts available and terms vary by school.
- Private Loans: These loans are available through other entities and organizations such as banks and credit unions. Each lender determines how much you can borrow and under what terms.
The Good, the Bad, the Ugly
What constitutes good student debt? That’s right, debt can be a good thing. With all of the warnings and news coverage about college costs and the implications of student debt this may be hard to believe, but you can make choices about loans that are beneficial. Funding that leads to greater employment opportunities and solid earnings, for example, is good. It’s the amount you borrow and terms you agree to that make the difference. Good debt is manageable – it helps you reach your goal and you are able to pay it back.
What constitutes bad student debt? This is what you hear about in the news. Students who borrow more than they can pay back are saddled with bad debt. This can happen for many reasons including not being able to find a job immediately after graduation or working in a low-paying field. It is possible to over-borrow, and to over-spend, on an education. Relying solely on loans to pay for college, or attending an expensive school to prepare for a career that does not offer high salaries, can lead to an overwhelming amount of debt.
Student loans don’t go away, even if you don’t earn enough in your job after graduation to cover repayment and your living expenses. If you are not able to finish your academic program any money you borrowed still needs to be paid back. If you fall behind in loan payments going into default affects your ability to build credit and borrow in the future (e.g., car loan, small business loan, mortgage).
Making Decisions About Loans
A recent article from The Chronicle of Higher Education asked students, parents, and educators “How much student-loan debt is too much?” for undergraduates. The answer seems to be “it depends.” There was no real agreement, other than a sort of consensus that the answer to the question is unique for each student.
Variables that can affect how much is too much include the type of institution (two- or four-year), academic major, expected salary after graduation, employment outlook, and whether or not the student will need to continue on to graduate school (with additional loans on the horizon). Make the most of accepting a student loan offer with these guidelines in mind:
- Don’t accept more than you need. Borrow only to cover your education-related costs. You may qualify for and be offered more than is required. Too many students accept more than they need for tuition, and use the rest for other expenses. It can seem like a windfall in some cases allowing you a more comfortable lifestyle now, but you’ll have to pay back the total loan, with interest, potentially making life less comfortable in the future. Work with financial aid advisors to adjust the amount you borrow.
- Getting a loan doesn’t mean you shouldn’t also be working. A part-time job that fits with your class and study schedule provides additional income each month. Every little bit helps. Consider opportunities in your local area and check in with your school’s student employment office.
- Take a hard look at your income potential after graduation. Taking on a high-cost degree program to enter a low-earning career field doesn’t add up. Tools like the U. S. Bureau of Labor Statistics Occupational Outlook Handbook and sites like PayScale.com provide information about how many new jobs are expected in the coming years and what professionals in your field of interest are earning.
- Reduce the number of credits you have to take. A recent study from The Learning House found that 80% of online students have earned transfer credits. Prior learning assessments, CLEP Tests, and competency-based programs also have the potential to decrease not only the number of courses you take, but also the time you spend earning a degree. These processes often take time to complete, as well as preparation and paperwork, but can reduce the overall cost of your education. After you enroll, stick to your degree plan and avoid taking “extra” courses that also add to your bill.
- Understand how each loan must be repaid. Different loans have different options and some are more flexible than others. Is your repayment amount fixed or based on your income after graduation? When must repayment begin? Is there a grace period? Keep track of how much you are borrowing and under what terms.
- Look at the big picture. Loans become a part of your overall financial status. Do you also have credit card debt or a car payment? Create a detailed inventory of your debts and assets. Know what you have and what you owe before taking on a new loan. It also helps to know what your living expenses are (e.g., housing, food, transportation, utilities), both while you’re in school and what you expect after graduation. Calculate what your monthly loan payments will be and how much you will have to earn to be able to cover them and your living expenses.
- Learn from the experiences of others. Many, many students have successfully funded their college education with loans. They completed their academic programs and managed repayment. How did they do it? Others struggle with the burden of student debt. What would they do differently? Talk with people you know who have accepted student loans, and read some of the advice available through organizations like the U.S. Department of Education, the Project on Student Debt and The College Board.
There are many other issues, of course, related to the high cost of higher education and increased student debt. Tuition rates are rising, there are some poor practices in recruiting and financial aid advising, and high unemployment means there are no guarantees that a degree will lead to a good job. Add to all of this a situation called “credential creep,” in which employers expect or prefer to hire college graduates for jobs that haven’t required degrees in the past.
There are calls for change on multiple levels, but the problems won’t be solved overnight, or even during the time you are a student. Setting realistic expectations for college includes a clear understanding of the commitment it requires. Do your homework before classes even start and make the best decisions you can about your education and financial future.
Source: Inside Online Learning Blog