4 Things to Consider Before Applying for a Student Loan

Quick Answer

Before you apply for a student loan, it's important to consider the cost, how repayment works, consequences if you can't make your payments and how those payments might impact your other financial obligations and goals.

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Student loans can provide much-needed help in paying the high cost of a college education. On average, consumers in the U.S. have an average of $39,487 in student loan debt, according to Experian data.

Starting your career and the rest of your life with that much debt can be a heavy burden to bear. So, even if you can't avoid student loans altogether, here are some things to think about before you apply.

1. The Cost of Taking Out Student Loans

Federal student loans are relatively inexpensive compared with other methods of borrowing, but the impact of loan fees and interest can still add up over time.

For the 2022-23 academic year, federal loan interest rates range from 4.99% to 7.54%, depending on the loan program. Additionally, you'll pay an upfront loan fee of 1.057% or 4.228%, deducted from your disbursement, depending on the type of loan you get.

If you were to have an average interest rate of 6% on a $39,487 balance, for example, you'd end up paying a total of $52,606 over the standard 10-year repayment period. If you extend your term or get on an income-driven repayment plan, total interest charges can be much higher.

In fact, with some income-driven repayment plans, your loan balance can potentially grow over time, even if you're making regular monthly payments.

2. How Repayment Works

With most student loans, your payments are deferred as long as you remain in school at least half time. Once you graduate, leave school or fall below half-time status, you'll typically get a six-month grace period, after which you'll need to start making monthly payments.

Student loan servicers and lenders will amortize your loan balance over your fixed repayment term to get your monthly payment, and unless you have subsidized federal loans or you make interest-only payments while you're in school, the interest that accrues while you're in school will be added to that balance.

If you have federal loans, you may be able to adjust your repayment term to a longer repayment period, a graduated repayment plan or even an income-driven repayment plan. Private lenders typically don't offer such features, but you could potentially change your repayment term if you refinance your loans.

3. What Happens if You Can't Afford Student Loan Payments?

If you have federal student loans, any of the four income-driven repayment plans the Education Department offers could help make your monthly payments more affordable. And if you encounter financial difficulties, you may even be able to qualify for forbearance or deferment, allowing you to pause payments for a time.

If you have private student loans, relief options may be limited and dependent on your lender. Income-driven repayment plans aren't typically available, and while some lenders may offer deferment or forbearance, the terms aren't usually generous compared to federal loans.

Late payments on both federal and private loans may incur penalties, and if you miss a payment by 30 days or more, it can damage your credit. If you stop paying altogether, your loans will go into default—it typically takes roughly nine months of nonpayment with federal loans but much shorter with private loans—your balance will become due immediately, and you may also be on the hook for collection fees.

4. How Student Loan Payments Can Impact Other Financial Goals

You may not have a lot of financial obligations or long-term financial goals while you're still in college, but once you start your career and have a steady income, you may start thinking about building an emergency fund, buying a house, saving for retirement and accomplishing other major financial milestones.

If you borrow a lot of student loans, though, you may have a hard time working toward other financial goals that are important to you. In some cases, student loan payments can make it impossible to achieve other objectives, at least until you pay off your debt in full.

Try to think ahead and consider the different objectives you want to work toward after college, and learn about how student loans can impact your progress toward them.

The Bottom Line

While the process of obtaining student loans can be easy, it's important to think carefully about the potential impact student loans can have on your financial situation once you graduate. Taking steps to pay for college using other methods, such as scholarships, grants, part-time work and other alternatives, can help you reduce your reliance on student loans and save you money in the long run.

Also, while you're still in school, start thinking about different ways you can build your credit history. Experian Go™ is a free service that provides resources to help you get started, as well as access to your FICO® Score and Experian credit report, so you can track your progress.

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