Finding and taking out student loans to pay for college can seem overwhelming. But if you know some key things about borrowing, then a college loan won’t be a problem.
Nobody likes debt; going to college isn’t cheap, so naturally, many would resolve to take student loans as a way out.
However, by arming yourself with some key knowledge, you can make informed choices and keep borrowing under control.
Keep reading for detailed information on everything you need to know about borrowing money for college.
Read Also: Which Student Loan Is The Best Overall?
10 Things to Know Before Borrowing for College
If you are searching “student loan near me,” make sure to understand these ten important things first:
1. Know the Difference Between Federal and Private Student Loans
The first big decision is whether to utilize federal or private student loans. Federal loans come from the government through programs like Direct Loans and Perkins Loans.
Private loans are from banks, credit unions, and online lenders. Federal loans typically have lower interest rates, more flexibility, and better borrower protections.
Over 90% of current student debt is in federal loans. Prioritize this borrowing before considering private loans.
Federal Student Loan Benefits
- Interest rates from 4.99% to 7.54% for undergrads
- Numerous flexible repayment plans based on income
- Options to postpone payments
- Potential for discharge or forgiveness
- No credit check or cosigner is required for most
Private Student Loan Considerations
- Generally have higher variable rates from 3% up to 15% or more
- Fewer options for payment postponement or discharge
- It may require a credit check and minimum income or cosigner
- Loan terms and protections vary widely between lenders
2. Understand Interest Rates, Fees and Costs
The interest rate on your loan greatly impacts total repayment costs. Current rates on federal undergraduate loans range from 4.99% to 7.54% fixed.
Depending on credit, private loans can range from 3% up to over 15% or more. Federal loans have no origination or early repayment fees, but private lenders often charge such fees.
Know the rates and all fees when comparing loan options.
3. Borrow Only What You Need for College
Calculate your full college costs, then subtract expected funding from:
- Savings and college funds
- Income and earnings
- Scholarships and grants
- Family contributions
- Employer tuition assistance
The remaining amount is what you should aim to borrow in student loans. Over-borrowing leads to unnecessary interest payments.
4. Know the Types of Federal Loans and Borrowing Limits
Main federal loan programs include Direct Subsidized and Unsubsidized Loans, Plus Loans and Perkins Loans.
Each has annual and aggregate limits based on dependency status and grade level.
Dependent undergrads can receive:
- Up to $5,500 in Direct Subsidized & Unsubsidized Loans yearly
- Total aggregate limit of $31,000
Independent undergrads qualify for the following:
- Up to $9,500 in Direct Subsidized & Unsubsidized Loans per year
- Total borrowing up to $57,500 aggregate
Maximize the best federal loan options available before considering more costly private borrowing.
5. Understand All Repayment Plans and Flexible Options
Standard federal loan repayment is fixed monthly payments for ten years. But alternative plans based on income and family size can help lower payments if needed:
- Income-Based Repayment (IBR) – Monthly payments at 10-15% of discretionary income. Forgiveness after 20-25 years.
- Pay As You Earn (PAYE) – 10% of discretionary income. Forgiveness after 20 years.
- Revised Pay As You Earn (REPAYE) – 10% of discretionary income. Forgiveness after 20-25 years.
- Income-Contingent Repayment – Payments of 20% discretionary income or fixed payments over 25 years.
- Extended Repayment – Fixed or graduated payments over a 25-year term.
- Graduated Repayment – Payments start low and increase every two years over the term.
You can change plans for free if your income changes after leaving school.
6. Use Deferments and Forbearances if Necessary
If facing financial hardship, federal student loans allow you to postpone payments through deferment or forbearance temporarily.
- Deferment pauses payments and interest on subsidized loans. Interest still accrues on unsubsidized loans.
- Forbearance pauses or reduces monthly payments for up to 12 months. Interest continues accruing.
These provide an important safety net but are used judiciously, as they extend loan terms and total interest costs.
7. Know the Pros and Cons of Loan Consolidation
Consolidating combines multiple federal student loans into one Direct Consolidation Loan. Benefits include simplified repayment with just one monthly bill.
- Loss of benefits like interest subsidies on underlying loans
- No reduction in total interest paid over the life of loans
- Potential for increased monthly payment if extending the term
- One-time option, cannot be reconsolidated later
Consolidation can help organize payments, but evaluate if it fits your circumstances.
8. Understand the Conditions for Federal Loan Forgiveness
Federal student loans may qualify for tax-free forgiveness or discharge in certain situations:
- Total and Permanent Disability Discharge – Federal loans discharged if disabled and unable to work.
- School Closure Discharge – Loans are forgiven if the school closed while enrolled or shortly after.
- Borrower Defense to Repayment – Loans are forgiven due to the school committing fraud.
- Public Service Loan Forgiveness (PSLF) – Forgiveness after 120 payments while working full-time for a qualifying employer.
- Teacher Loan Forgiveness – Up to $17,500 forgiven after five years of teaching at an eligible school.
- Income-Driven Repayment Forgiveness – The remaining balance is forgiven after 20-25 years of payments.
9. Avoid Delinquency and Default
Missing student loan payments leads to delinquency and can result in default. Consequences of default include:
- The entire loan balance and interest are immediately due
- Up to 15% collection fees added
- Wage garnishment without a court order
- Seizure of tax refunds
- Plummeting credit score
- Ineligibility for future federal aid
If struggling to make payments, avoid default by utilizing options like deferment, forbearance, income-based repayment, or loan rehabilitation.
10. Use Student Loan Tax Benefits
Some helpful tax benefits can lower student loan costs:
- Student loan interest is deductible up to $2,500 annually on federal taxes for those under $85,000 per year or $175,000 for married couples.
- Employers can contribute up to $5,250 per year to student loans tax-free through educational assistance programs.
- Loans forgiven under certain conditions are not counted as taxable income.
Making wise borrowing choices for college requires you to know all federal and private student loan options.
Follow this advice to make affordable financing decisions for college and keep payments manageable after graduation.