Show of hands: how many of you are hoping (or assuming) that your parents will handle the college loan process for you?
If that’s you, you’re not alone. Many students are already busy enough applying for school admission and scholarships. Plus, you may assume that parents are more qualified to navigate the loan process.
While it’s true that parents can be a tremendously valuable resource in choosing and securing college loans, it’s critical for students to get involved as well.
In this article, we’re going to give you the straight scoop on how your loans can impact your future, and point out some red flags you should look out for when evaluating private student loans.
1) Loans can have a massive impact on your post-college lifestyle
For most students, college loans are their first step into the world of adult finances. Decisions you make now could impact you 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 or becoming financially independent.
Most student loans are structured with you as the as loan holder and your parents as the cosigner. That means that you’re ultimately responsible for paying college loans back, even if your parents are helping you out.
If something happens where your parents are unable to 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.
Red flag alert: A common stumble for many students is borrowing more than they can expect to reasonably 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 what kind of loan payments you’ll be able to handle after graduation.
2) Loan forgiveness is rare
Many people have the mistaken belief that it’s easy to get out of paying a student loan for various reasons, such as the death of a cosigner, agreeing to work in under-privileged areas or under-served fields, or establishing a solid payment history.
Unfortunately, those assumptions are largely incorrect. In fact, student loans are one of the few kinds of debt that cannot be wiped away with bankruptcy in most instances.
While some federal loan forgiveness plans do exist, it’s important to know that many of them are currently in jeopardy due to the political climate. For those that still exist, 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 do not graduate, you still have to pay your 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 that students have little chance of ever repaying them. That’s why it’s critical to ensure that you’re working with reputable lenders. Check our suggestions for the best banks 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 will be getting charged interest from the very second that 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.
Making interest-only payments (or even larger payments than that) while you’re in college will keep interest from capitalizing. While it may not reduce the size of your overall debt, it will prevent the size of your debt from swelling.
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.
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, federal subsidized loans are a fantastic deal, because the government makes interest payments for you while you’re in school. That ensures that you’re not racking up interest on interest every month that you’re in school.
Federal unsubsidized loans are also an excellent deal. While these loans do not include government assistance, they are often offered at very low interest rates. (See Subsidized vs. Unsubsidized Loans: What’s the Difference? to learn more.)
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.
Remember, starting college brings new responsibilities. Getting involved in your student loan selection now can be key to building a sound financial future.