Consumer Comeback Blog

How to Decide Which Student Loans to Accept

Written by Jeffrey Trull

student-loansThe extreme expense of a college education isn’t breaking news, yet graduates still come out shocked once loan payments come due. With average student loan debt hovering around $23,000 upon graduation, paying back what was borrowed becomes a significant monthly expense, and grads aren’t always prepared to start chipping away at what they owe.

Fixing the problem students face doesn’t end with lowering the cost of education. Being smart and selective about borrowing money for college must fit into the equation, too.

Here’s how to decide which student loans to take and when you may be better off declining to borrow more.

Prepare an After College Budget

If you’re unsure how your money situation will play out after college, sit down and draw out a sample budget that includes paying off your debt. Even just a rough estimate for your expenses based on where you’ll live, what you’ll own, and the income you’ll have will give you a better idea for how to prepare.

Joseph Orsolini, a Certified Financial Planner that focuses on college aid, explains that students should consider their post-college budgets and goals and factor loan payments into their plans. “A student coming out of college with $27k in debt (and with the corresponding $311 per month payment) will have a very tight budget if they want to move out [of their parent's home] and get a car,” Orsolini says. These types of expenses result in several fixed monthly costs in addition to the loan payments.

Along with budgeting, your starting salary will play a big impact. Orsolini says how much loan students can afford depends on “earning potential of their chosen career. If you plan on becoming a doctor, you can borrow more than someone becoming a social worker.” He recommends looking at the Bureau of Labor Statistics to get an idea of what starting salary to expect for an average worker in your field. There’s a wide range of salaries you can expect to earn after college, and much of what determines your earnings depends on your field as well as your location.

Exhaust Other Cost-Defraying Options

Loans shouldn’t just be seen as the single easy option for financing your college education. You might think it makes sense to pay off your loans once you have a real job with a real salary, but it’s often more difficult and lengthy process than college undergrads anticipate.

Think about other options before you load up on loans, like:

  • Applying for scholarships. Scholarships are basically free money. Yes, there’s some work involved to find them, but they’re hard to beat when compared to other options for paying tuition. Perhaps you can earn high-value scholarships for your academic record or athletics. Or you can apply for smaller ones that might pay out anywhere from a few hundred to thousands of dollars. Don’t forget that a lot of scholarships have similar requirements, so it’s possible to use your response or essay for more than one application to make applying to many scholarships easier. Here’s a strategy that earned over $100,000.
  • Finding a job during college. Holding down a job while taking classes is challenging, but the income can be a huge help during and after college. If you can pay part of your tuition by working, you’ll reduce the loan amount and save on interest, too. Even if you just have a work-study job, you might be able to easily earn money that you can use for spending instead of relying on student loans or credit cards to cover living expenses like textbooks, rent, or food.
  • Considering a lower-cost education. No one likes to hear they can’t attend a certain college because it’s too expensive. But it’s worth considering less costly options, especially if you’ve been granted scholarships. Unless you’re extremely confident that the more expensive school will offer a huge advantage in your career, give your second or third choice a shot, and hopefully you’ll end up saving big on loans you don’t need to take out.

Examine Loans Beyond Interest Rates

Loans still vary widely not only in interest rates but with repayment, too. Federal loans typically offer the best rates and most flexible terms. If you’re eyeing private loans, remember the terms often differ from federal loans and may come at increased cost.

In addition to just interest, the repayment terms of loans matter, too. Federal loans come with built-in options for making the payment schedule more flexible. There are several choices that are common and even more choices if you’re facing hardships. It’s usually as easy as applying and being approved for these repayment plans. This can make a huge difference if you’re unable to pay back what you owe on standard repayment terms.

With private loans, you might have less flexibility to adjust how you pay your loans back. These loans may have variable rates and require cosigners, too. Your lender might be less willing to offer forbearance or deferment on your loan after graduation except for certain special circumstances.

No matter what stage you’re at with your education, the choice is ultimately yours for what loans you take out. Whatever you decide, prepare ahead of time, and don’t end up regretting your student loan decisions later.