5 Things Incoming Freshman Must Know About Student Loans (Even if Your Parents Are Helping)
Show of hands: How many of you are hoping (or assuming) that your parents or guardians will handle the college loan process for you?
If that’s you, you’re not alone. Many students are busy enough applying for school admission and scholarships. And you may assume the adults in your life are more qualified to navigate the loan process.
While it’s true that parent, guardians, and other trusted relatives can be a tremendously valuable resource in choosing and securing college loans, it’s critical for students themselves to get involved too.
We've got the straight scoop on how your student loans can impact your future, and point out the red flags you should look out for when evaluating private student loans.
1) Student loans have a massive impact on your post-college lifestyle
For most students, student loans are their first step into the world of adult finances. Decisions you make now could impact your lifestyle for a decade or more after you graduate. Not to put too fine a point on it, but getting the right loan could mean the difference between living in your parents’ basement after graduation or becoming financially independent.
Most private student loans are structured with you as the as loan holder and your parents or another relative as the cosigner. That means you’re ultimately responsible for paying college loans back, even if your family are helping you out.
If something unexpected happens and your family is unable to help make payments — someone loses a job, becomes disabled, or suffers some other consequence that makes it impossible to work — those loans will have to be paid by you. On your own.
Red flag alert: A common stumble for many students is borrowing more than they can reasonablyexpect to repay based on their post-college income. To get a better sense of what this might look like based on your anticipated income, use our free NitroScore tool to estimate the loan payments you’ll be able to realistically handle after graduation.
2) Student loan forgiveness is rare
Many people have heard that it’s fairly easy to get out of paying a student loan for various reasons, such as the death of a cosigner, agreeing to work in underprivileged areas or underserved fields, or establishing a solid payment history.
Unfortunately, that's largely incorrect. In fact, student loans are one of the few kinds of debt that usually can't be wiped away even through bankruptcy.
While federal student loan forgiveness plans do exist, they aren't easy to take advantage of. You’re often required to dedicate 10 years of work within very specific parameters before any of your debt is forgiven. That can severely limit your ability to advance in your career, build new skill sets, or even relocate. See The Truth About Student Loan Forgiveness Programs to learn about the instances you may be able seek loan forgiveness.
Red flag alert: Some loans include a scary provision that requires the entire loan balance to be paid immediately upon the death of a cosigner. This is sometimes referred to as automatic default. Be sure to look at provisions about cosigner death before signing anything. While no one wants to think about this, it’s better to be safe than sorry.
3) If you don't graduate, you still have to pay your student loans
If you find that college isn’t for you, your student loans still have to paid, and often, you’ll have to start making payments right away. That means you’ll be on the hook for generating income fast, without the benefit of the college degree you had hoped for.
This is another reason why getting the best loan terms possible is important.
Red flag alert: Some unscrupulous lenders structure loans so students have little chance of ever repaying them. It’s critical to ensure you’re working with reputable lenders. Check out our suggestions for the best options for private student loans.
4) Making zero payments until after graduation is a bad idea
Nearly all lenders offer a payment option that allows you to defer repayment until after graduation. This may seem like a great idea — and your parents may encourage you to take it so you can focus on your studies — but in reality, taking this payment option will balloon the size of your debt.
Here’s why: You'll be getting charged interest from the very second your lender hands over your loan money. Interest that doesn’t get paid off each month capitalizes. Capitalizing means that unpaid interest gets added to your total loan amount.
What happens then? The next time interest is calculated, you’ll have to pay interest on a larger loan amount.
Let's be honest: Not every student (or their family) is in a position to start making payments on student loans before graduation. But if you can find a way to make even small payments — say, enough to cover the monthly interest — while you’re in college it'll keep that interest from capitalizing. It won't reduce the size of your overall debt, but it will prevent the size of your debt from swelling. And if you can pay even more toward your student loans while still in school, so much the better.
Red flag alert: Any type of deferment, including grace periods after graduation, can cause interest to capitalize. See Everything You Need to Know About Interest Rates to learn more.
5) Parents may not be experts on student loans
Even if your parents are extremely smart and have your best interests in mind, there can be a pretty steep learning curve with student loans. And the student loan market — including the types of loans and lenders — is not the same as it was when your parents went to school.
Take the lead to ensure that you’ve filled out the FAFSA, which is the Free Application for Federal Student Loans.
FAFSA will automatically qualify you for federal loans. If you qualify for federal subsidized loans, they're a fantastic deal, because the government makes interest payments for you while you’re in school. That ensures you’re not racking up interest on top of interest every month that you’re in school.
Federal unsubsidized loans are also an excellent deal. While these loans don't include government assistance, they're often offered at very low interest rates. (See Subsidized vs. Unsubsidized Loans: What’s the Difference? to learn more.)
Filling out the FAFSA will also tell you if you qualify for other kinds of financial aid that doesn't need to be repaid: grants, work-study, etc. The more of that student aid you can get, the less you'll need to borrow.
Red flag alert: Many financial aid counselors report that failing to fill out the FAFSA is the biggest mistake most people make on their financial aid. Don’t let that be you! See our handy guide for help completing your FAFSA.
Going to college is the start of many new responsibilities. It's exciting, and, yeah, a little scary sometimes. But getting involved in your student loan selection now is a key step to building your own sound financial future.