For many families, sending a child to college involves solving a financial riddle. Compared to high school graduates, college grads typically have higher lifetime earnings and lower rates of unemployment. However, those benefits only pay off if students and parents don't end up buried under a mountain of student loan debt.
According to Experian's 2017 State of Student Lending, the average student loan borrower has four different student loans totaling an average of $34,000.
Lots of people, however, have racked up well over $100,000 in student loans, the Federal Reserve Bank of New York reports:
"While about 36% of student debt holders owed less than $10,000, and 65 percent owed less than $25,000, only about 5% of student debt holders owed more than $100,000 in debt in 2016. Yet these big-balance borrowers account for nearly 30% of the total balances outstanding, so their outcomes and repayment success have a disproportionate influence on the overall picture."
One of the best educational moves every college-bound family can make—even before they start applying to schools—is to spend some time studying the different types of student loans that are available to them, and then run the numbers. In other words, before you borrow a dime, figure out what your payments are actually likely to be, and make sure you can truly afford to borrow without putting other financial necessities at risk.
Graduates with too much student debt might have a tough time saving up for a home down payment. Parents who take on too much student loan debt run the risk of falling behind on saving for retirement. Beyond that, student loan debt can have a serious impact on your credit, and perhaps most importantly, it's just about the only type of personal debt that generally isn't dischargeable in bankruptcy. So once you take it on, you're pretty much stuck with it.
With all that in mind, here are four things you need to know about student loans, along with the resources you need to learn about them:
1. The cost of your student loans
Every family that has been through the SAT/AP test wringer knows about the nonprofit College Board, which administers those college entrance and placement exams. The College Board's BigFuture website has all sorts of college planning advice and information. Click on the Pay for College tab and you will land on a trove of articles that explain the ABCs of college loans.
As college nears, every family should spend some time using the site's free Student Loan Comparison Calculator to get a real-world estimate of the monthly cost to repay the loans.
2. Federal vs private student loans
The Consumer Finance Protection Bureau is a federal government agency established to make sure "banks, lenders, and other financial companies treat you fairly." In addition to their regulatory responsibilities, the CFPB has a deep bench of Q&As relating to student loans, and a Choosing a Loan section that delivers a clear and concise explanation of the difference between federal student loans and private student loans.
Federal student loans are the smart first stop for borrowing. The studentaid.ed.gov website is the U.S. Department of Education's home for financial aid info, including a deep dive into the various types federal college loans. Students can learn about Perkins and Stafford loans, and parents can get up to speed on loans offered through the PLUS program.
4. Interest rates on student loans
A part of the nonprofit Institute for College Access & Success, the Project on Student Debt maintains an up-to-date rundown of current federal student loan rates and borrowing limits. For any family considering taking out private student loans, spending some time reading through the site's Private Loans and Resources section is a must to make sure you understand the potential risks of borrowing from banks and credit unions, rather than from the federal loan program.