Do I need a student loan?

Do I need a student loan?
Eileen St. Pierre, The Everyday Financial Planner

college studentAs of October 1, parents and students can submit their FAFSA application for the 2017-2018 school year (three months earlier than in past years). Students still need to apply and be accepted at a college or university before a financial aid package can be put together. Just because you are offered student loans, does not mean that you have to accept them.

So before you accept your aid package, ask yourself this question – Do I need a student loan? Here are some tips to help you make this decision.

First, determine how much college is going to cost.

Create a college budget. There are plenty of good templates out there, such as those from Mint and cicmoney101. What makes things a bit tricky is that some income (financial awards) and expenses (tuition, fees, and books) do not occur on a regular monthly basis. There may be some expenses you have to pay up front and those you can spread out over a semester. Don’t forget those “extras” like going out with friends, trips home, and car repairs.

Next, look for free money.

You don’t have to be a 4.0 student to qualify for scholarships and grants. When I was an undergrad in the late 80’s, I remember mailing $25 to a company for a list of potential free money. Now thanks to the internet, you have a lot more free information at your fingertips. Check out these sites:

Start early! Don’t wait until spring of senior year.

If you must borrow, follow these rules of thumb.

  1. Keep your total debt no more than your expected first year salary in your chosen profession.
  2. Your anticipated debt payment should be no more than 10-15% of your expected monthly gross income.

Here’s the bottom line – To make a good financial decision about how much debt to take on, you need to research what you expect to earn in your chosen major. If you don’t know what you want to do yet, then you shouldn’t rely too much on student loans. To get a sense of the salaries in your chosen major, check out these websites:

Federal, subsidized loans are the cheapest.

If you must borrow, stick with federal loans – Direct (Stafford) and Perkins loans. Private loans are more expensive and your parents will most likely have to co-sign, putting their own credit at risk.  Other advantages to using federal loans include:

  • There are many repayment options available, including income-based repayment plans.
  • They are easy to consolidate.
  • You may be eligible for loan forgiveness.
  • They may be subsidized.

Subsidized federal loans are offered to undergrads with demonstrated financial need. Here’s what makes them a cheap option – Interest doesn’t accrue while you are in school. With unsubsidized loans, you do not have to demonstrate financial need and they are also available for graduate students. You just have to remember that the interest will start accruing right away. The interest rate for both subsidized and unsubsidized Direct loans for 2016-2017 is 3.76% for undergrads. The interest rate on Direct loans for graduate students currently stands at 5.1%.

If you would like more information on this topic, please join me for a free webinar on October 20 from 3:30 to 4:00, Central Time. Click HERE to register.

Additional resources can be found at my College Planning page.