Aug 03, 2012 Lindie Johnson

Education Loan Basics

Wondering if an education loan is the right choice for you or your family? There are many considerations you should take into account before borrowing. Many people will be quick to tell you that student loans are "good debt." But the fact is, no debt is good debt if you aren't borrowing responsibly! Before you borrow, even for college, make sure:

1. You can afford to pay back what you borrow.Download borrowing guide

Certain types of education loans, mainly federal student loans, have loan limits. Typically, even if you borrow the maximum Stafford Loan amount for each academic year, your student loan payment after graduation will be fairly manageable (but that shouldn't stop you from looking into how much it will be!). However, if you borrow beyond these amount, let's say by also borrowing a state-based loan or private student loan, be careful you understand how much your monthly student loan payments will be after graduation. Even when borrowing federal Stafford or Perkins loan, you should know how much you will have to pay back each month after graduation and how much you are likely to earn in the career you are planning to pursue.

2. You understand the options available to you.

You should never put your tuition bill on your credit card! Many credit cards have interest rates 15% - 20% or even higher! A subsidized federal Stafford loan has a rate of 3.4%. That means, if you put $5,000 on your credit card at a rate of 20%, you would accrue $1,000 in just one year if you don't pay it

Interest has a huge impact on what you pay
 Depending on the repayment option you choose on your federal Stafford loan, you can a very different amount in interest. Keep in mind the standard repayment option, which has a maximum 10 year term, will usually lead to the lowest total finance charges. If you want to pay more, you can do so any time without penalty.

back (but keep in mind minimum payments do apply on your credit card from the time it is used). A subsidized Stafford loan wouldn't require you to make payments until after you graduate, the interest accrued would be paid by the government until you graduate, and in one year that same $5,000 would only accrue $170 in interest! If you need to borrow beyond the Stafford loan, you can consider a state-based education loan, a federal PLUS loan (in your parent's name), or a private education loan.

3. You give a lot of thought before signing the note.

Don't just "sign now, deal later." Really take the time to understand your obligation and you will be in a better place than most of your peers after graduation. Read up on loans, smart borrowing, and financial literacy.

4. You understand what your parents will need to borrow to help pay for your education, and if they expect you to help them pay it back after graduation.

Some options are available to your parents that aren't available to you, such as the federal parent PLUS loan. This loan carries and interest rate of 7.9% and has a 4% fee. The loan is exclusively in your parent's name, but some parents make an agreement with their child to borrow this loan only if they will receive assistance from you in paying it back. If this is the deal with your parents, make sure you know how much you will need to pay back each month and add this into your big post-graduation financial picture. Another option is to look into state-based loan in your area, which typically are signed by both the student and parent.

What to know more about paying for college and borrowing? Make an appointment with the College Planning Center.

Published by Lindie Johnson August 3, 2012
Lindie Johnson