No one knows better than recent grads how expensive college is. The college class of 2016 graduated with an average of $37,172 in student loans, says to Mark Kantrowitz, a higher-education expert. They were the most indebted class ever – up 6 percent from the year before.
With debt totals climbing each year, it’s easy to picture today’s high school seniors owing more than $40,000 when they finish college. With another 6 percent increase, we’d almost reach that number this year.
That amount of debt can affect you for a long time. But students don't want the financial choices they made in high school to affect them as senior citizens.
[Discover why new federal regulations could help families decide about college debt.]
Fortunately, you don’t have to be an expert to make smart student loan decisions. Here are three key facts to know about student loans now that will help you set yourself up for future success.
1. You are responsible. When you borrow any student loan, you agree to repay that amount in full – plus interest. Even if you drop out, are unhappy with the education you receive or can’t get a job after graduation, you still owe this money.
In certain circumstances, you may be able to have your loans discharged or forgiven, but never borrow with these outcomes in mind.
Falling behind on loan payments can lead to serious consequences. Among them, your loan can become more expensive due to collection costs; your loan holder can take money directly from your paychecks to cover what you owe; and your credit score can take a major hit. You’ll want that score in good shape postgraduation, since it’s necessary for things like renting an apartment or getting a car loan.
If you haven’t already decided which school to attend, do your research to ensure you make a good investment. Use tools like the College Navigator and College Scorecard to look at prospective schools' graduation rate, job placement info and more.
Often, selecting a school is an emotional decision, but with $40,000 or more on the line, try to be rational. These data can help you do that.
2. You can make payments while in school. As an undergraduate student, you’ll primarily receive two types of federal student loans: subsidized and unsubsidized Stafford loans.
When enrolled at least half time, you don’t have to pay the interest building up on your loans, thanks to the in-school deferment. But that doesn’t mean you won’t pay the interest eventually, depending on which type you have.
You are not responsible for paying interest on subsidized loans during an approved deferment. However, on unsubsidized loans, you will have to pay this interest when your loans enter repayment.
At that point, it gets added onto the amount you borrowed. This not only increases your monthly payments, but it also increases the amount that future interest accrues upon.
To counteract these negative effects, you can pay this interest as you go. Start paying your freshman year, and the amounts will be much more manageable.
You can also make early payments toward your principal balance. Simply contact your loan holder to get started. If you don’t know who this is, you can look it up in the National Student Loan Data System.
If your parents use a Parent PLUS loan to meet the tuition gap, they may also be able to defer repayment while you’re in school. If so, they should also consider paying at least the interest that accrues during this time to avoid that increased balance.
3. Private and federal loans differ greatly. Receiving federal financial aid for college requires a number of steps. When you borrow student loans, it’s important to understand this process. Odds are, you’ve completed the financial aid process and your family is now figuring how to pay.
Understand that federal student loans and private loans are very different – and we recommend you max out the federal loan options first.
Federal student loans come with a number of benefits typically unavailable with private options. Once they enter repayment, federal student loans let you base payments on your income, pause repayment if you’re unemployed or facing a financial hardship, and potentially forgive your balance if you meet certain criteria.
You also receive certain protections, such as a loan discharge if the borrower dies or suffers a total and permanent disability. This is not always the case for private loans.
But no matter which loans you use to finance your education, borrow only what you need – you don’t have to accept all the financial aid offered to you. Remember that you will have to repay whatever you do take – with interest on top.
Ryan Lane / Contributor
Ryan Lane is the senior editor for American Student Assistance, where he oversees the financial website saltmoney.org and its online community, SALT Central. He graduated from Syracuse University with a B.S. in journalism.