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What You Need To Know Before You Borrow For College

Here’s how to make the most of what you borrow

Last month, student loan debt in the United States reached a record $1.465 trillion (yes, with a “t”). Young adults are saddled with so much debt that it’s affecting their ability to take the next steps in their lives, like getting married, having children and buying a house. If you’ve already got debt, it’s important to consider repayment options that will allow you to get out from under while still maintaining the ability to have a life including refinancing or income-based repayment. But if you’re still looking at college debt as something that’s happening in the future, you’ve got an opportunity to be smarter about borrowing than many who came before you. Here’s what you should know.

Know private vs. federal loans

Student loans are the largest source of debt in the United States after mortgages ($10.1 trillion), according to a study by SuperMoney. Before you apply for any kind of loan, first understand what you’re getting. Nearly 40 percent of students polled by College Ave Student Loans said they were uncertain of the difference between private and federal loans. The main difference is this: The government funds federal loans while banks supply private ones. With federal loans, borrowers can choose an income-driven repayment plan (if they have difficulty affording their monthly payments) and they also don’t have to start paying back the loan until after they graduate. Federal loans are also provide fixed interest rates (which is currently 5.05 percent for an undergraduate federal loan). Meanwhile, private student loans could have fixed or variable rates — and you may have to pay if while you are still in school as interest also piles up on top of the principal amount. And unlike federal loans that have different repayment plans if you are struggling with payments, you’d have to work directly with your lender to come up with a solution. It’s best to max out your ability to borrow with federal loans before dipping into the private market.

Know subsidized vs. unsubsidized loans

“One thing all students need to understand is the difference between a subsidized and unsubsidized federal loan. Both have the same interest rates, so it’s easy to mix them up,” says Miron Lulic, founder and CEO of SuperMoney. Essentially, you don’t have to pay the interest on a subsidized loan while you are enrolled in school at least half-time, also subsidized loans enjoy a six-month grace period for the first six months after you leave school. Unsubsidized federal student loans don’t get these same perks. Also, they don’t require you to prove a financial need to qualify.

Know student loan forgiveness

“Student loan forgiveness programs are great but don’t base your career and occupation choices on it. These programs are designed to make lower paying careers an option for students with a lot of student debt,” says Lulic. Which is why, at least financially speaking, pursuing a job in a higher-paying field is the better route according to Lulic. The eligibility criteria for these programs is often confusing. “They typically require workers to stick with the same occupation for five to 25 years to qualify. In 2018, over 28,000 borrowers applied for The Public Service Loan Forgiveness program, but only 96 qualified,” says Lulic. Income-driven repayment forgiveness programs are another option that’s available to federal student loan borrower regardless of whether they are working in public service.

With Hattie Burgher

Jean Chatzky

Jean Chatzky