5 things to consider before taking out a student loan

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16.9 million.

This is the number of students who will go to college at the undergraduate level this fall. Of this number, about half – 46% – will take out federal student loans. It’s a move that could bring some rewards – not the least of which is a well-paid job – but it can also have serious economic consequences.

The average debt of the 2017 class was estimated at 28 650 USD. And not everyone is able to make regular payments on their student loans. The federal government reports that 10.8% of student loan borrowers who started repaying in 2015 have since defaulted.

As researchers who specialize in how money shapes the way people make education decisions, here are five tips for students and families thinking about how to pay for college.

1. File an early application for federal assistance using old tax returns

Even though it seems like a routine thing to do, more than 2 million people do not file a free application for federal student aid, better known as the FAFSA. Sometimes parents and students are not familiar with this form. Some parents may be reluctant to provide their tax return information, which is used to determine eligibility for student aid.

The FAFSA deposit can be especially important for students whose families have little or no money to pay for their education. In these cases, students may be eligible for the federal program Pell Grants Program, which is awarded to students with significant financial need and does not have to be reimbursed. The FAFSA filing may also be required for other financial aid that students receive from the state or college they plan to attend.

Since 2015, students can use their tax return “previous year” to complement their FAFSA. For example, a student who files a FAFSA in 2019 can use information from their 2017 federal income tax return. This allows students to complete the FAFSA as early as possible to understand and compare financial aids and options, instead of ” have to wait for more recent tax returns. FAFSAs for the 2020-2021 school year can be filed in October 2019, giving students more time to understand and compare financial aid offers and options.

2. Understand the different types of loans

Different loan options include federal loans, private loans from banks or credit cards.

Federal loans are usually your best option. This is because federal loans often have low fixed rates. Federal loans also have provisions for adjournment, a period during which your loans do not bear interest. They offer a grace period before the start of the repayment period and abstention, which is a period during which you might be allowed to defer payment if you are having difficulty making payments. However, during forbearance, your monthly student loan balance continues to accumulate interest. Federal loans also come with various reimbursement programs, such as income-based reimbursement.

You can see options for subsidized and unsubsidized loans. Soft loans are funded by the government and offer better terms. They are needs based and do not earn interest while you are still in school. Unsubsidized loans may be available regardless of your financial needs, but they earn interest as soon as the loan is distributed to you.

Private loans tend to have higher interest rates, although the rates for these loans and credit cards can fluctuate. Private loans also do not allow participation in government repayment programs.

3. Contact your financial aid advisor

Call the financial aid office to find out who your assigned financial aid advisor is at the school you plan to attend. This person can help you better understand your institutional support system.

Meeting with a financial aid advisor is essential.
fizkes / Shutterstock.com

Review the different sources of help listed in your financial aid award letter. Some sources of help may be Institutional Grants, which are basically financial aid offered by the college you plan to attend.

Other sources include federal loans and federal work-study. The federal alternation is neither a scholarship nor a loan. Instead of, this program allows students to defray their study costs by working on campus.

Some schools offer loans, such as Parent PLUS Loans, directly in the award letter to you and your family.

4. Understand the impact of debt

Taking out loans for college can be an investment in your future, especially when the loan money allows you to work less and focus more on classes to get your degree in a timely manner. Research consistently shows that a college degree is worth the cost. On average, university graduates earn a lot more during their professional careers than their peers who did not graduate from college.

However, students who take out loans should be aware of the amount they are borrowing. Unfortunately, many students don’t know how much they owe Where how student loan debt works.

Access National Student Loan Data System to learn more about your federal personal loans. Over a million borrowers in the United States are currently in default on their student loans after failing to make their monthly payments for a period of approximately nine months. Defaulting on student loans can have serious consequences that hurt your credit and prevent you from receiving financial assistance in the future. The federal government can also seize part of your salary or withhold your tax refund. You can also lose your loan deferral and forbearance eligibility and ruin your credit score.

In addition, incurring a large debt can have other long-term implications. For example, debt can affect your ability to to buy a house Where leave your parents’ house.

5. Know your repayment options

When thinking about your repayment options, there are many factors that can influence the amount of money you could earn after college, including your major and your career path. Since your future salary may influence your ability to repay loans, it is important that borrowers have an idea of ​​income in different fields and industries. Yet many students not have a precise idea how much money they can expect to earn in the careers they are considering, although this information can be found in the Career Outlook Handbook.

There are several options designed to help borrowers repay their loans, including income-level plans and loan forgiveness programs.

To make loan repayments more manageable based on your income, consider a income based repayment plan depending on your loan and your financial situation. Borrowers must request income-based repayment plans. Income-based repayment plans allow borrowers to pay between 10% and 20% of their discretionary income each month towards their student loans, rather than the predetermined payment based on the loan amount.

Borrowers can also look for loan forgiveness programs offered by their state or for certain professions. These types of programs may be available to provide funding to students while in college, or who forgo part of the loans if graduates move into jobs where skilled people are needed, such as the teaching profession.

Another option could be the public service loan forgiveness program offered by the federal government to students working in public service jobs, such as teaching or non-profit organizations. However, the large majority of people asking for a civil service loan forgiveness have been turned down.

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