Student Loans

Choosing a College and Career path should be one of the most exciting times of a High-schoolers life. However, the choices you make now can have huge ramifications on the rest of your life, not for the reasons you may be thinking. You spend time looking at the college, deciding if you will live on the campus or not, what career path you take, and the income you hope to make once graduating. If you have not looked into how much debt this will put you in, what the debt is and the time it will take you to pay back, what the interest on your student loan is, then you are walking on dangerously thin ice. Financial Literacy is a skill required to go to college, not to gain entry, but to survive and come out the other end with a decent chance of building wealth once you enter the workforce.

What is a Student Loan? 

A student loan is a loan to assist students when paying for college or university. Going away to school comes with a hefty cost that most Americans can not afford at such an early age. A college degree has become a prerequisite for many professions, student loans offer the flexibility to pursue one’s passions in college by compromising  money that they can repay once they have graduated. 

But do students fully understand the financial burden that these loans can impose on them post-graduation? Many students pursue college to grow their income potential in an increasingly skilled labor force, but they might not be able to afford to pursue their passions if their potential job or field of interest won’t allow them to meet their monthly loan payments. Students often find themselves relying on loans and credit cards to get them through college, borrowing more, and starting their career path with debt. Having excess debt requires one to dedicate much of their income to paying off outstanding loans rather than building wealth for the future. This cycle actively delays the commencement of other important financial goals, such as saving for retirement, buying a house, or even simply having an emergency savings account for an unexpected bill or cost.

As the price of college continues to grow at a higher rate than inflation, so does student debt. Student loan debt in the U.S. has more than doubled over the past decade. And this ever-increasing crisis is not going away any time soon. For the 2020–2021 school year, the average cost of tuition was $41,411 to attend a private college — at public colleges, the average cost of tuition was $11,171 for in-state students and $26,809 for out-of-state students. The majority of Americans cannot afford to bridge the gap between need-based financial aid and the cost of admission simply out of pocket. As a result, many students turn to loans with high interest rates and a hefty burden to carry as they enter the workforce.

Alternatives to Student Loans

1. Financial Aid

When considering universities, it is wise to consider the school’s generosity with financial aid in addition to the academic programs that the school has to offer. Every college is required to have a net price calculator, and making sure you can afford the school to which you are applying is essential before hitting submit on your application. Some applicants believe that they will receive more financial aid from less well-known universities rather than the big names like the Ivy Leagues. This has led to the phenomenon called “undermatching.” According to research conducted by Stanford economist Caroline Hoxby, many minorities and financially disadvantaged students do not apply to top schools despite having the scores and grades typically required for admission. Undermatching happens disproportionately to minorities and low-income students because they aren’t given the proper information on financial support available to them and thus believe that the most prestigious colleges are also the most cost-prohibitive. On the contrary, the most selective schools typically offer more financial aid than smaller colleges. At Stanford, for example, “families earning less than $150,000 with assets typical of that income level pay no tuition.” With this in mind, it is important to understand the difference between need-blind and need-aware programs. Need-blind means that they will not be taking your financial status into consideration during the review of your application, whereas need-aware means that they will be looking at your ability to pay. Colleges use these terms to describe their admissions processes as well as their scholarship programs.  To apply for need-based financial aid, and depending on the school’s requirements, you will likely fill out the Free Application for Federal Student Aid (FAFSA) and/or CSS Profile to share your family’s financial status with colleges.

2. Merit-Based Scholarships

Many colleges not only provide need-based scholarships but also merit-based scholarships. Merit-based scholarships through colleges are typically granted for academic, athletic, or artistic achievements. Many students miss out on these opportunities to be granted more financial aid simply because they are unaware of the programs out there. When you hear the word “scholarship,” you perhaps exclusively think of money granted by schools for students who have already been accepted, but you’d be surprised by the number of opportunities out there to help you pay for school! In addition to the financial aid resources available at your college, there are many institutions and organizations that have scholarship funds readily available to you. Merit-based scholarships flood the internet every college admissions season: A quick scroll through Unigo can expose you to hundreds of scholarship opportunities that you can apply to with just an essay or sometimes even less! Not enough students take advantage of these resources when trying to pay for school, despite the fact that these merit-based scholarships could provide a couple hundred bucks for books or even a full ride to pay for your dream school. 

Navigating Student Loans

After you’ve done your research on your scholarship and financial aid programs, you may still need to take out a student loan. There are two primary routes of getting loans: private and government.

Private Student Loans

A private loan resembles a personal loan, as it is financed through a financial institution, credit union, or state loan. It merely bridges a gap between the actual cost and federal loan assistance. The loan is available to both undergrad and graduate students and is based on a credit check. A score of 640 or better is required. However, you may qualify with bad credit as the institution will decide based on future earnings and other factors if you are an eligible candidate. A parent or creditworthy guardian or individual may co-sign on your behalf and are then responsible to repay the loan if you are unable to. Unlike federal loans, there is no subsidy, and you may even have to pay off the loan during your studies. These privately operate so that the legal modulation may not apply. These loans are typically more expensive and may depend on market prices because rates, limits, and terms are set by a private lender. Loan forgiveness and repayment programs are not an option with a private loan.  

Federal Student Loans

The government's primary tenable loans come in three different packages. The federal laws modulate the loans and hope to ensure all students can access education regardless of their financial background (Types of Student Loans, n.d.). They are cheaper than private loans because they do not aim for profits. 

Direct Subsidized Loans

These are loans to eligible students based on financial needs. It covers higher education costs in the education institutions and is recoverable after the completion of the course (Subsidized and Unsubsidized Loans, 2019). A subsidized loan caters to undergrad students with an annual income of less than $50,000. The federal government agrees to pay off the interest either while you're attending college, during a grace period of 6 months after graduating, or during a deferment. The loan is limited to $3500 during year one, $4500 during year two, and $5500 during year three. Students fill forms upon which due diligence processes determine whether they qualify or not. 

Direct Unsubsidized Loans

They are loans available to offset some financial shortfalls, even for people with massive wealth (Subsidized and Unsubsidized Loans, 2019). Unsubsidized loans are not based on financial need and are available to both undergraduate and graduate students. You will have to pay off the interest, and payment is usually deferred and postponed until after graduation. The college or university you attend will determine how much money you need to borrow, depending on the cost of attendance and in conjunction with any other aid received. A loan limit is applied and within a range of $5500 and $12,500. You can receive a larger loan if you are financially independent. Both loans are fixed at a 2.75% interest rate. A direct unsubsidized loan is, however, more expensive than the subsidized one. It includes a loan fee of either 1.066% or 1.062% which depends on the disbursement date; there is a subsidy limit of $23,000 and a loan limit of $31,000.

Direct PLUS Loans

These loans also do not depend on financial need and thus require an economic history to determine eligibility. Undergrads dependent on their parents and graduate students may use PLUS loans at a fixed interest of 7.08% and 6.08%, respectively. The loan may cover any educational cost that financial aid does not cover. Bear in mind a credit check is required, and any adverse credit history must then meet additional requirements. Parents with a strong credit score and history may refinance the loan and gain an even lower interest rate. These loans also do not depend on financial need and thus require an economic history to determine eligibility. Undergrads dependent on their parents and graduate students may use PLUS loans at a fixed interest of 7.08% and 6.08%, respectively. The loan may cover any educational cost that financial aid does not cover. Bear in mind a credit check is required, and any adverse credit history must then meet additional requirements. Parents with a strong credit score and history may refinance the loan and gain an even lower interest rate.  

Loans can be manageable if you know how to shop for the best options and plan your repayment. It is crucial to look for the lowest interest rate and not settle for the first offer you get. Websites like Credible allow you to compare multiple offers from lenders to ensure that you receive the best rate. If you are unable to get a low interest rate now, you can refinance your loans later on as you develop your credit history. To do so, it is important that you keep up with your monthly payments in order to improve your credit score.

Although going away to college comes with a hefty price tag, it’s definitely an investment worth making and one that can be made manageable if you know all of the tools at your disposal. By seeking out resources dedicated to financial literacy, you will be better prepared to make informed decisions about pursuing financial aid, scholarships, or loans.